ERISA, The ADA and Insurance—What is Your Client Entitled To?

Mark D. DeBofsky

Daley, DeBofsky & Bryant

One North LaSalle

Suite 3800

Chicago, IL 60602

(312) 372-5200

FAX (312) 372-2778

mdebofsky@ddbchicago.com

Introduction

It is impossible today to represent clients in the area of health, life, or disability insurance without at least a rudimentary understanding of ERISA, the ADA, and how the two laws often interrelate. ERISA alone would justify a two to three day seminar because it is one of the most comprehensive, but least understood, federal laws. Similarly, the ADA is often misunderstood and offers far less protection than employees believe they have.

Some Definitions

The first essential point to keep in mind is that when insurance benefits are offered by a private, non-religious employer, they are governed by ERISA, thus transforming disputes under those plans to substantially different administration and legal procedures than would govern individual insurance claims, which are litigated essentially as breach of contract actions. ERISA is an acronym for the "Employee Retirement Income Security Act of 1974", which was established to

protect . . . participants in employee benefit plans and their beneficiaries, by requiring the disclosure and reporting to participants and beneficiaries of financial and other information with respect thereto, by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies, sanctions, and ready access to the Federal Courts.

29 U.S.C. §1001(b); quoted in Varity Corporation v. Howe, 116 S.Ct. 1065, 1078 (1996).

The reason that ERISA applies to group insurance claims is that the law was broadly drafted to encompass any and all "employee welfare plan[s]" or "welfare plan[s]" which are defined to include any

plan, fund, or program which . . . was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care of benefits, or benefits in the event of sickness, accident, disability, death or unemployment or vacations benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services . . .”

29 U.S.C. §1002(1).

This definition applies both to insured and self-insured plans, a point made clear by the Supreme Court in two companion decisions, Pilot Life Insurance Co. v. Dedeaux, 481 U.S. 41 (1987) and Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58 (1987). Both cases involved claims for disability insurance benefits; but the significance of those cases in relation to any welfare benefit is that the decisions firmly established three issues: 1) ERISA applies to insured as well as self-insured employee benefit claims; 2) any suit seeking “welfare” benefits is removable to the federal court; and 3) ERISA preempts any attempt to seek extra-contractual damages. When ERISA applies, its preemption provisions are extremely broad – ERISA preempts all efforts and means to regulate employee benefit plans. The only exception would be state laws that directly regulate insurance, an illustration of which was recently issued by the Supreme Court in UNUM Life Insurance Company of America v. Ward, 119 S.Ct. 1380 (1999). There, the Court ruled that a principle of insurance law known as the notice-prejudice rule is saved from preemption by ERISA to allow for late filing of disability claims. However, under another provision of ERISA’s preemption clause, state regulation will not apply to self-funded plans, which are not “deemed” insurance companies.

As a result of Taylor and Dedeaux, employers and insurers were presented with a near-impenetrable shield in employee benefits litigation. They were able to remove all claims to federal court to avoid the risk of inconsistent state court rulings; and they were insulated from extra-contractual damages. Moreover, as will be explained below, transforming even the basic garden variety of insurance claim into an ERISA lawsuit gave insurers/employers their most effective weapon of all: deferential review.

Pre-Suit Considerations/Exhaustion of Administrative Remedies

If a claim is denied by an insurance company or a self-insured plan’s administrator, before resorting to litigation, the ERISA statute affords the claimant the right to a “full and fair review.” 29 U.S.C. §1133. Indeed, that requirement is considered virtually mandatory, being based on a strong federal policy that favors exhaustion of the administrative remedies afforded by the “full and fair review.” Although an exhaustion requirement is not explicitly set forth in the ERISA statute, the policy behind requiring exhaustion is to prevent “premature judicial intervention”; exhaustion also assures the courts that a claim has been fully considered by the plan administrator. Powell v. AT&T Communications, Inc., 938 F.2d 823, 826 (7th Cir. 1991). Exhaustion is also intended to “decrease the cost and time of claims settlement.” Wilczynski v. Lumbermens Mutual Casualty Co., 93 F.2d 397, 402 (7th Cir. 1996)(citing Powell).

Exhaustion of remedies is not always mandatory, though. The two principal exceptions to the exhaustion requirement are 1) a lack of meaningful access to the review procedures and 2) where exhaustion would be futile. Smith v. Blue Cross & Blue Shield United of Wisconsin, 959 F.2d 655, 658-59 (7th Cir. 1992). The first exception is somewhat self-explanatory; and will be applied in cases where “claimant attempts to initiate higher levels of review procedure, but a party has denied claimant access to higher levels of review.” Id.. Thus, if the administrator refuses to allow the claimant to participate in a review, administrative exhaustion is excused. A related example is where a letter denying benefits does not advise of the appeal procedures. In such cases, the duty to exhaust administrative appeals is excused because of the plan administrator’s failure to meet the condition precedent of notifying the claimant of the appeal procedures. Conley v. Pitney Bowes, 34 F.3d 714 (8th Cir. 1994).

Cases involving excused administrative review due to futility have interpreted that exception to apply to situations where a plan administrator has allowed an appeal, but informed the claimant that the decision would not be changed; i.e., that the appeal is “doomed to fail.” Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1485 (9th Cir. 1995).

A third exception, although rarely used, is when there is a danger of irreparable harm. An example would be a denial of a particular medical treatment that must be administered immediately to save the patient’s life. In such cases, ERISA procedures need not be exhausted. Henderson v. Bodine Aluminum, Inc., 70 F.3d 958 (8th Cir. 1995).

The consequences of a claimant’s failure to exhaust required administrative remedies is that the court may not consider the merits of the dispute. In Smith v. Blue Cross, supra., the penalty imposed was summary judgment. More typical, however, is that the court will remand the claim for reconsideration by the plan administrator. Makar v. Health Care Corp. of Mid-Atlantic, 872 F.2d 80, 83 (4th Cir. 1989). However, as a warning to claimants who skip the appeal process and proceed directly to court, in Tiger v. AT&T Technologies Plan for Employees’ Pensions, Disability Benefits, 633 F.Supp. 532 (E.D.N.Y. 1986), the court found that the failure to appeal a benefit denial within the sixty day period set forth in the ERISA plan was a bar to judicial review. Similarly, in Graham v. Federal Express Corporation, 725 F.Supp. 429 (W.D.Ark. 1989), the court barred a judicial action when the plaintiff failed to appeal a claim within the sixty day period allotted by the plan. Moreover, because the 60 day appeal period had long since elapsed when the action was brought, all further appeals were deemed untimely. Thus, the appeal period could act as a statute of limitations that precludes judicial review when a claimant fails to exhaust administrative remedies.

An additional reason to take the review seriously is because there may not be another opportunity afforded to submit evidence. In Quesinberry v. Life Insurance Company of North America, 987 F.2d 1017 (4th Cir. 1993), the court held that in most benefits claims, the court should only consider the evidence presented to the plan administrator. Only exceptional circumstances in claims that receive a de novo review by the district court will justify receipt of additional evidence. The court catalogued those circumstances to include the following:

claims that require consideration of complex medical questions or issues regarding the credibility of medical experts; the availability of very limited administrative review procedures with little or no evidentiary record; the necessity of evidence regarding interpretation of the terms of the plan rather than specific historical facts; instances where the payor and the administrator are the same entity and the court is concerned about impartiality; claims which would have been insurance contract claims prior to ERISA; and circumstances in which there is additional evidence that the claimant could not have presented in the administrative process.

987 F.2d at 1027; also see, Chambers v. Family Health Plan Corporation, 100 F.3d 818 (10th Cir. 1996)(catalogues cases on whether, and under what circumstances, additional evidence may be submitted in court).

Procedure for Administrative Review

The trigger for the administrative appeal is the denial letter. According to the ERISA regulations, there are very specific requirements for such letters. However, as stated by the Seventh Circuit Court of Appeals, those requirements may be summarized as follows: “In a nutshell, ERISA requires that specific reasons for denial be communicated to the claimant and that the claimant be afforded an opportunity for 'full and fair review' by the administrator.” Halpin v. W.W. Grainger, 962 F.2d 685, 688 (7th Cir. 1992). In order to meet those basic requirements, denial notices must contain:

(1) The specific reason or reasons for the denial;

(2) Specific reference to pertinent plan provisions on which the denial is based;

(3) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and

(4) Appropriate information as to the steps to be taken if the participant or beneficiary wishes to submit his or her claim for review.

29 C.F.R. §2560.503-1(f). Absent substantial compliance with these requirements, the claimant is deemed to have been denied a full and fair review, and the benefit denial is subject to being vacated. Halpin, supra.; Conley, supra. (proper denial letter is condition precedent to claimant’s duty to appeal). Likewise, in Booton v. Lockheed Medical Benefit Plan, 110 F.3d 1461 (9th Cir. 1997), the court cited the immortal line from Cool Hand Luke (“What we got here is a failure to communicate”) to overturn a dental claim denial because the defendant’s denial letter was unintelligible.

Upon receipt of the notice of denial, the claimant must be allowed a minimum of 60 days to submit an appeal. Then, after the appeal is submitted, the plan administrator is allowed 60 days to determine the appeal; or, if special circumstances exist (such as the need for a face to face hearing), the decision can be deferred for up to 120 days. 29 C.F.R. §2560.503-1(h).

For the review to meet the statutory requirement of being “full and fair”, the procedure must allow the claimant or his representative to “(i) request a review upon written application to the plan; (ii) review pertinent documents; and (iii) submit issues and comments in writing. 29 C.F.R. §2560.503-1(g)(1).

A frequent point of contention in the review process is the meaning of the requirement that the plan administrator allow review of “pertinent documents.” The Seventh Circuit recently ruled that production of the entire claim file is not required. Wilczynski, supra. Instead, the court limited the requirement to the somewhat amorphous obligation of “providing claimants with access to ‘the evidence the decision maker relied upon’ in denying their claim.” Id. (citations omitted). A more thorough explanation was presented in a case that preceded Wilczynski.. In Halpin v. W.W. Grainger, Inc., 962 F.2d 685 (7th Cir. 1992), the court explained the intent of these regulations:

[T]he persistent core requirements of review intended to be full and fair include knowing what evidence the decision-maker relied upon, having an opportunity to address the accuracy and reliability of that evidence, and having the decision-maker consider the evidence presented by both parties prior to reaching and rendering his decision.

Halpin, supra. at 962 F.2d at 689 (citations omitted). The foregoing discussion incorporates the fundamental requirements of due process and

ensures that a full and fair review is conducted by the administrator, enables the claimant to prepare adequately for appeal to the federal courts or further administrative review, and makes it possible for the courts to perform the task, entrusted to them by ERISA, of reviewing that denial.

962 F.2d at 693.

Without these requirements, a claimant is unfairly hindered in presenting an appeal by not knowing what evidence needs to be challenged. By requiring that the administrator articulate its view of the evidence, the claimant is informed about any possible misperceptions of medical reports and is given the opportunity to supplement the record in order to present additional medical evidence. Fundamental due process rights are thereby preserved.

Indeed, the administrative appeal is usually the best opportunity to reverse an unfavorable determination. Because of the requirement that the claimant is entitled to a “full and fair review”, a denial of benefits cannot be rubber-stamped. In addition, because most of these claims will be reviewed in court under a deferential standard of review, the failure to win at the administrative review will often significantly diminish the chances of succeeding in court.

This issue is currently under further consideration by the Department of Labor. In revisions to the regulations published in the Federal Register on September 9, 1998 (63 Fed.Reg. 48390), many of the controversial points discussed above would be clarified. Hearings on the regulations took place on February 17-19, 1999, although final regulations have yet to be issued. Among the significant issues contained in the revisions are the following:

· Time frames for decisionmaking are clarified

· In emergency situations, the timeframes are shortened to 72 hours

· New disclosure requirements mandate sharing of the entire claim file with the claimant

· In addition to providing documents specific to the claim, the plan must also provide internal rules, guidelines, protocols, and criteria under which the plan operates

· In certain circumstances claimants must also be given documentation regarding how similar claims were handled

· The same party who made the initial decision cannot conduct the review

· Clarification that claimants can have considered on appeal all relevant information regardless of whether it was submitted as part of the initial claim

· Loss of deference upon judicial review should a plan not follow the regulatory guidelines

· Exposure of the plan to fiduciary liability for failure to follow guidelines

Jurisdiction

Of course, not all administrative reviews will be successful and litigation will often result. Civil enforcement of claims brought under ERISA is provided by §502 of the statute (codified at 29 U.S.C. §1132). Principally, claims for disability insurance benefits are brought under 29 U.S.C. §1132(a)(1)(B), which states:

A civil action may be brought (1) by a participant or beneficiary -- to recover benefits due to him under the terms of his plan, to reinforce his rights under the terms of the plan, or to clarify his rights to future benefits under the terms of the plan.

Another possible source of jurisdiction is 29 U.S.C. §1132(a)(3), which allows suits to be brought

by a participant, beneficiary, or fiduciary (A) to enjoin any act or practice which violates any provision of this title or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of this title or the terms of the plan.

Such claims, however, which allege breach of fiduciary duty, are usually dismissed by the courts since an adequate remedy can be had under §502(a)(1)(B) (29 U.S.C. §1132(a)(1)(B)). Varity Corporation v. Howe, 116 S.Ct. 1065, 1079 (1996) warned that claims for breach of fiduciary duty may only be brought sparingly and are not available where there is an adequate remedy under §502(a)(1)(B). Usually, fiduciary duty breach claims are limited to situations involving misrepresentation of benefits, although misrepresentations are not actionable in cases where the claimant could not justifiably rely on the information conveyed. Pohl v. National Benefits Consultants, Inc., 956 F.2d 126 (7th Cir.1992).

Another key jurisdictional issue is the proper forum in which to bring suit. ERISA provides for concurrent state court jurisdiction over benefit claims brought pursuant to §502(a)(1)(B). However, as a practical matter, the vast majority of these claims are determined in federal court, even if originally filed in state court, because of removal jurisdiction. Metropolitan Life Insurance Co. v. Taylor, 481 U.S. 58 (1987).

Finally, it is important to consider the proper parties in a suit under ERISA. Courts have relied primarily on the language of 29 U.S.C. § 1132(d)(2) ("Any money judgment under this subchapter against an employee benefit plan shall be enforceable only against the plan as an entity and shall not be enforceable against any other person unless liability against such person is established in his individual capacity under this subchapter.") to hold that the only party defendant to an ERISA claim is the plan itself. Jass v. Prudential Health Care Plan, Inc., 88 F.3d 1482 (7th Cir. 1996), where the court found the plan, which was the insurer, was the only proper defendant.

Litigation—The Standard of Review

Probably, the most significant issue in any claim under ERISA, and the issue most likely to be outcome determinative, is the standard of review applied by the court. Because there are elements of trust law inherent in ERISA, the plan administrator is able to reserve discretionary authority to construe the terms of its plan and to determine claims. However, if such discretion is not reserved, the court must apply a de novo standard of review to the plan administrator’s determinations. Firestone Tire and Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948 (1989).

If discretion is reserved, the court reviews the claim under an abuse of discretion standard or will determine whether the decision was arbitrary and capricious (although the two terms are often used interchangeably). Chambers v. Family Health Plan Corporation, 100 F.3d 818 (10th Cir. 1996). A claim determination is arbitrary and capricious under the following standard as expressed by the Seventh Circuit:

. . . the fiduciary must examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’ . . . In reviewing that explanation, we must ‘consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment.’ . . . Normally, [a decision by a plan administrator] would be arbitrary and capricious if the [administrator] relied on factors which Congress had not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before [it] or is so implausible that it could not be ascribed to a difference in view or the product of [its] expertise.

Reilly v. Blue Cross & Blue Shield United of Wisconsin, 846 F.2d 416, 420 (7th Cir. 1988)(citations omitted), relying on Motor Vehicle Manufacturers Assn. of the United States, Inc. v. State Farm Mut.Auto.Ins.Co., 463 U.S. 29, 43, 103 S.Ct. 2856 (1983).

An abuse of discretion is found “where the decision is in bad faith, not supported by substantial evidence, or erroneous on a question of law.” Williamson v. UNUM Life Insurance Company of America, 943 F.Supp. 1226 (C.D.Cal. 1996); citing Nevill v. Shell Oil Co., 835 F.2d 209, 212 (9th Cir. 1987); also see, Morton v. Smith, 91 F.3d 867 (7th Cir. 1996)(abuse of discretion found when a decision is “not just clearly incorrect but downright unreasonable.” (citation omitted)). Further, an abuse of discretion may be found where an ERISA plan administrator makes a decision that “conflicts with the plain language of the plan.” Saffle v. Sierra Pacific Power Company, 85 F.3d 455, 458 (9th Cir. 1996)(citing Taft v. Equitable Life Assurance Soc., 9 F.3d 1469, 1472 (9th Cir. 1993)). In addition, there is also case law holding that because treating physician reports are entitled to greater weight than reports from non-examining doctors and consultants, the refusal to give appropriate weight to such reports is an abuse of discretion. Donaho v. FMC Corporation, 74 F.3d 894, 901 (8th Cir. 1996); Dodson v. Woodmen of the World Life Insurance Society, 109 F.3d 436, 439 (8th Cir. 1997).

In order to ascertain the appropriate standard of review, it is necessary to examine the ERISA plan language. For example, in Kearney v. Standard Insurance Company, 175 F.3d 1084 (9th Cir. 1999)(en banc), a case involving a disability claim filed by a trial attorney who claimed he was unable to continue working in his profession, one of the key issues was whether language in the disability insurance policy requiring submission of “satisfactory written proof” of disability conferred discretion to determine claim eligibility. The court found such language was ambiguous and did not imply a reservation of discretion.

Similarly, in Kinstler v. First Reliance Standard Life Insurance Company, 181 F.3d 243 (2d Cir. 1999), the court ruled the de novo standard of review applies both to plan interpretations and factual determinations. Kinstler, which also involved a disability claim brought under ERISA, found that language in the plan requiring the insured to submit proof satisfactory to the insurer, was still insufficient to reserve discretion. The court ruled its opinion was “reinforced . . . by recognition of the relative ease with which ERISA plans may be worded explicitly to reserve to plan administrators the discretionary authority that will insulate all aspects of their decisions from de novo review.” . The court added:

But a more fundamental point than this fine distinction about wording is that the word ‘satisfactory,’ whether in the phrase ‘satisfactory proof’ or the phrase ‘proof satisfactory to [the decision-maker]’ is an inadequate way to convey the idea that a plan administrator has discretion. Every plan that is administered requires submission of proof that will ‘satisfy’ the administrator. No plan provides benefits when the administrator thinks that benefits should not be paid! Thus, saying that proof must be satisfactory ‘to the administrator’ merely states the obvious point that the administrator is the decision-maker, at least in the first instance. Though we reiterate that no one word or phrase must always be used to confer discretionary authority, the administrator’s burden to demonstrate insulation from de novo review requires either language stating that the award of benefits is within the discretion of the plan administrator or language that is plainly the functional equivalent of such wording. Since clear language can be readily drafted and included in policies, even in the context of collectively bargained benefit plan when the parties really intend to subject claim denials to judicial review under a deferential standard, courts should require clear language and decline to search in semantic swamps for arguable grants of discretion.

However, another decision, Perez v. Aetna, 150 F.3d 550 (6th Cir. 1998), ruled that deference may be granted even based on minimal language that states that evidence need merely be satisfactory, because such language implies deference to determine whether the evidence is indeed satisfactory. A similar decision was reached in Patterson v. Caterpillar, Inc., 70 F.3d 503 (7th Cir. 1995) where the court ruled deference could be found from language that “benefits will be payable only upon receipt by the Insurance Carrier or Company of such notice and such due proof, as shall be from time to time required, of such disability.” (although the viability of that ruling is questionable in light of a later decision, Ramsey v. Hercules, Inc., 77 F.3d 199 (7th Cir. 1996), where the court ruled a more specific grant of deference is required.

Other cases find a grant of discretion when the following language is used: Donato v. Metropolitan Life Insur. Co., 19 F.3d 375 (7th Cir. 1994)(“all proof must be satisfactory to us”); Miller v. Metropolitan Life Ins.Co., 925 F.2d 979 (6th Cir. 1991)(“on the basis of medical evidence satisfactory to the company”); Bali v. Blue Cross and Blue Shield Association, 873 F.2d 1043 (7th Cir. 1989)(“on the basis of medical evidence satisfactory to the Committee”).

Even if the “arbitrary and capricious” or “abuse of discretion” standards are applied to reviews of employee benefit claims, that standard is not always absolute. In the Firestone Tire & Rubber Co. v. Bruch decision, the Court briefly discussed the possibility of a conflict of interest that exists where the plan administrator is also the payor of benefits, holding that such a conflict “must be weighed as a factor in determining whether there is an abuse of discretion.” 489 U.S. at 115.

The Seventh Circuit has expressed varying positions on the issue. For example, in Hightshue v. AIG Life Ins. Co., 135 F.3d 1144, 1148 (7th Cir. 1998), a disability benefits case involving environmental illness, where the court ruled the denial of benefits was not an abuse of discretion, the court recognized the potential for a conflict of interest, and stated:

We recognize that AIG has a conflict of interest, because of its interests as both claims administrator and insurer. See, e.g., Donato, 19 F.3d at 379 n. 3. Firestone noted that the existence of a conflict of interest must be considered in determining whether the fiduciary acted arbitrarily and capriciously. 489 U.S. at 115, 109 S.Ct. at 956-57. When it is "possible to question the fiduciaries' loyalty, they are obliged at a minimum to engage in an intensive and scrupulous independent investigation of their options to insure that they act in the best interests of the plan beneficiaries." Leigh v. Engle, 727 F.2d 113, 125-26 (7th Cir.1984). Seeking independent expert advice is evidence of a thorough investigation, and provided that the fiduciary has investigated the expert's qualifications, has provided the expert with complete and accurate information, and determined that reliance on the expert's advice is reasonably justified under the circumstances, the fiduciary's decision will be respected, despite the conflict of interest. Howard v. Shay, 100 F.3d 1484, 1488 (9th Cir.1996).

A few months later, though, the Seventh Circuit held in Mers v. Marriott Intern. Group Accidental Death and Dismemberment Plan, 144 F.3d 1014 (7th Cir. 1998), a life insurance benefits case, that merely because an insurer is both claim administrator and claim payor, a conflict of interest cannot be presumed. Therefore, absent specific proof of actual bias, the court will not reduce the degree of deference accorded the benefits administration decision.

However, other courts find such conflicts render the plan’s decisions “presumptively void.” In Brown v. Blue Cross and Blue Shield, 898 F.2d 1556 (11th Cir. 1990); cert. denied 498 U.S. 1040 (1991), the court explained the “presumptively void” standard by ruling that in the presence of a substantial conflict of interest,

the burden shifts to the fiduciary to prove that its interpretation of plan provisions committed to its discretion was not tainted by self interest. That is, a wrong but apparently reasonable interpretation is arbitrary and capricious if it advances the conflicting interest of the fiduciary at the expense of the affected beneficiary or beneficiaries unless the fiduciary justifies the interpretation on the ground of its benefit to the class of all participants and beneficiaries.

898 F.2d at 1566-67; also see, Atwood v. Newmont Gold Co., 45 F.3d 1317, 1323 (9th Cir. 1995)(court “should not defer to the administrator’s presumptively void decision.”); Kotrosits v. GATX Corp., 970 F.2d 1165, 1173 (3d Cir. 1992); cert. denied 506 U.S. 1021 (conflict of interest “counsels in favor of withholding deference”).

Following these standards, a recent decision involving disability benefits ruled an insurance company was suffering from an inherent conflict of interest when it terminated a claim for disability benefits by applying an exclusion for mental disorders limiting payments to a maximum of two years. In Lang v. Long-Term Disability Plan of Sponsor Applied Remote Technology, Inc., 125 F.3d 794 (9th Cir. 1997), the court ruled an insurer’s decision would be reviewed de novo despite the insurance plan’s reservation of discretion on the ground that the insurer could not show its decision was not tainted by self-interest.

On a similar issue, in Mitchell v. Eastman Kodak, 113 F.3d 433 (3d Cir. 1997), the court overturned a disability insurer’s requirement that a claimant suffering from chronic fatigue syndrome could not collect benefit absent objective proof of disability. The court determined that no plan language supported such a requirement; nor is compliance with such a requirement feasible in cases involving conditions such as chronic fatigue syndrome, where medical science has failed to develop objective testing. In light of such factors, the court held that it would defeat the legitimate expectations of policyholders to impose extracontractual requirements that the claimant could not meet.

Litigation of ERISA Claims and Limitations on

Recovery of Extracontractual Damages

The standard of review is not the only problem facing claimants in ERISA litigation. The scope of damages is also an important consideration because unlike typical “bad faith” insurance litigation, ERISA strictly limits damages that may be recovered. Since Pilot Life, there have been a variety of decisions precluding recovery for extracontractual damages in ERISA claims. For example, the Seventh Circuit ruled in Reilly v. Blue Cross and Blue Shield United of Wisconsin, 846 F.2d 416 (7th Cir. 1988) that claims alleging intentional infliction of emotional distress and loss of consortium are preempted by ERISA, along with claims for conspiracy, fraud and common law bad faith. 846 F.2d at 425-426.

Similarly, state laws imposing penalties on insurers who act in bad faith or unreasonably delay payment of claims (e.g., 215 ILCS 5/155) are also preempted by ERISA and are not available to ERISA claimants. Kanne v. Connecticut General Life Ins. Co., 867 F.2d 489 (9th Cir. 1988); Anschultz v. Connecticut General Life Ins. Co., 850 F.2d 1467 (11th Cir. 1988). Also see: Bishop v. Provident Life and Casualty Insurance Co., 749 F.Supp. 176 (E.D.Tenn. 1990)(Tennessee bad faith claims processing statute); and Harris v. Blue Cross and Blue Shield of Texas, 729 F.Supp. 49 (N.D.Tex. 1990)(Texas law of bad faith, breach of duty of good faith and fair dealing). However, this issue may be reopened in light of the Supreme Court’s apparent retreat from preemption in the recent ruling in UNUM v. Ward, 119 S.Ct. 1380 (1999).

Accordingly, at least for the present time, damages in ERISA claims are limited to the remedies available under the plan. No matter how egregiously wrong or improper the plan administrator’s behavior, a claimant will not be allowed any additional compensatory and punitive damages. The limitations of such an approach was discussed in Dishman v. UNUM, 21 EBC 2941 (C.D.Cal. 1996), where a court found that an insurer’s termination of disability payments egregious and unscrupulous. Nonetheless, the court’s ability to punish the offending insurer was limited by its statutory authority.

Jury Trials

Under the present state of the law, the ERISA statute’s silence regarding the availability of jury trials precludes the right to trial by jury. The reasoning of the courts is that ERISA claims are equitable rather than legal in nature; and many of the issues require a judge’s determination, such as whether the plan administrator’s decision was arbitrary and capricious or an abuse of discretion. In the Seventh Circuit, the principal case is Wardle v. Central States, Southeast and Southwest Areas Pension Fund, 627 F.2d 820 (7th Cir. 1983). Also see, Sullivan v. LTV Aerospace and Defense Co., 82 F.3d 1251 (2d Cir. 1996) and Morgan v. Ameritech, 26 F.Supp.2d 1087 (C.D.Ill. 1998)(court collects cases pro and con regarding jury trial right—decision that there is no right to jury trial).

Attorneys' Fees

Although extracontractual damages are generally disallowed in ERISA litigation, pursuant to 29 U.S.C. §1132(g), the court in its discretion may award attorneys' fees and costs to the prevailing party in an ERISA suit. While not required, an award of fees is “expected absent special circumstances which would make an award unjust.” Stanton v. Larry Fowler Trucking, Inc., 52 F.3d 723 (8th Cir. 1995); Smith v. CMTA-IAM Pension Trust, 746 F.2d 587 (9th Cir. 1984). The majority of courts apply a five factor test to determine whether a prevailing plaintiff is entitled to fees in an ERISA benefit case. In Bittner v. Sadoff & Rudoy Industries, 728 F.2d 820, 828 (7th Cir. 1984), the court set forth those factors:

(1) The degree of the offending parties' culpability or bad faith; (2) the degree of the ability of the offending party to satisfy personally an award of attorney's fees; (3) whether or not an award of attorney's fees against the opposing parties would deter other persons acting under similar circumstances; (4) the amount of benefit as a whole; and (5) the relative merits of the parties' positions.

Id.; also see,. Armistead v. Vernitron Corp., 944 F.2d 1287 (6th Cir. 1991); Nachwalter v. Christie, 805 F.2d 956 (11th Cir. 1986); Eddy v. Colonial Life Ins. Co., 59 F.3d 201 (D.C.Cir. 1995). Bittner also stands for the proposition that there is a modest presumption in favor of awarding fees.

Attorneys’ fees may also be awarded to a prevailing defendant; however, such awards are rare and are generally made only in cases involving plaintiff bad faith or if the case is wholly frivolous. Maune v. IBEW Local No. 1 Health Fund, 83 F.3d 959 (8th Cir. 1996); Little v. Cox’s Supermarkets, 71 F.3d 637 (7th Cir. 1995).

Finally, as to the amount of fees that may be awarded, under the Supreme Court’s ruling in City of Burlington v. Dague, 112 S.Ct. 2638 (1992), it is no longer permissible for a court to award a fee multiplier; however, it may still be possible to have the lodestar adjusted to reflect the risk of non-recovery.

SOME SELECTED “HOT” ISSUES IN ERISA AND ADA CLAIMS

The ADA and Employee Benefit Claims

The Americans with Disabilities Act, 42 U.S.C. §12101, protects disabled individuals against discrimination both with respect to employment as well as with respect to access to public accommodations, which includes access to goods and services. Thus, although there may be no ERISA violation in certain plan decisions, the Americans with Disabilities Act may have a role and mandate a different outcome in certain circumstances. For example, while ERISA does not mandate how a benefit plan is designed, discrimination against discrete disabling conditions may violate the ADA. Yet even disability based distinctions may still be permissible because the ADA contains a “safe harbor” allowing such distinctions if based on actuary data or claims experience. Some recent decisions suggest that the courts are having difficulty grappling with these issues, though. For example, in the case of a distinction between mental and physical disability claims, courts have generally ruled that such broad-based distinctions are lawful. Typically, such benefits are paid for a maximum of two years unless the claimant is confined to an institution at the end of that period. The issue is one that is also confounding to psychiatry. According to the Diagnostic and Statistical Manual of Mental Disorders IV, the mind/body distinction is confounding. That text states,

Although this volume is titled the Diagnostic and Statistical Manual of Mental Disorders, the term mental disorder unfortunately implies a distinction between “mental” disorders and “physical” disorders that is a reductionistic anachronism of mind/body dualism. A compelling literature documents that there is much “physical” in “mental” disorders and much “mental” in physical disorders. The problem raised by the term “mental” disorders has been much clearer than its solution, and, unfortunately, the term persists in the title of DSM-IV because we have not found an appropriate substitute.

DSM-IV at xxi.

A challenge to the two year limitation for mental disorders was brought by the Equal Employment Opportunity Commission in EEOC v. CNA Insurance Companies, 96 F.3d 1039 (7th Cir. 1996). The EEOC contended that the distinction between mental and physical disability benefits violated the employment discrimination provisions of the ADA (Title I). The court disagreed and ruled that because the disabled employee could no longer perform her job duties, she was not a “qualified individual with a disability” subject to protection by the employment provisions of the ADA. 42 U.S.C. §12117. In somewhat inscrutable language, though, the court limited it’s holding to Title I of the ADA (discrimination in employment).

That holding was expanded to claims under Title III of the ADA (discrimination in the provision of goods and services). In Parker v. Metropolitan Life Insurance Company, 121 F.3d 1006 (6th Cir. 1997), the court, on rehearing, reversed an earlier decision holding that such limitations violated the ADA.

Although there are still some decisions finding policy distinctions between mental and physical disabilities violate the ADA (Attar v. UNUM, 1997 WL 446439 (N.D.Tex. 1997) and in Leonard F. v. Israel Discount Bank, 967 F.Supp. 802 (S.D.N.Y. 1997)), the Courts of Appeal have been unanimous in finding no violation, the most recent example being Lewis v. K-Mart, 180 F.3d 166 (4th Cir. 1999).

ADA concepts have also been used in cases in which insurers have denied disability benefits where the disability may not exist if the employer provided a reasonable accommodation to the employee. Although the court in Saffle v. Sierra Pacific, 85 F.3d 455, 458 (9th Cir. 1996) ruled that creating such a requirement when the insurance plan did not allow for such considerations, the Seventh Circuit ruled to the contrary in a case where the plaintiff had refused an actual accommodation that had been offered. Ross v. Indiana State Teacher's Ass'n Ins. Trust, 159 F.3d 1001 (7th Cir. 1998).

However, related to Saffle and Ross is another hot topic-- whether a claim for disability benefits estops presentation of a claim for employment discrimination under the ADA. In some of the earlier cases, several Courts of Appeals ruled that applicants for social security disability who claim total disability on statements submitted in support of their applications are barred from claiming discrimination in employment on account of a disability. McNemar v. Disney Store, Inc., 91 F.3d 610 (3d Cir. 1996), Kennedy v. Applause, Inc., 90 F.3d 1477 (9th Cir. 1996); and Rissetto v. Plumbers and Steamfitters Local 343, 94 F.3d 597 (9th Cir. 1996). The reasoning applied in those ruligns is that in order to claim protection under the ADA, an employee must be a “qualified individual with a disability”, which is defined as an “individual with a disability who, with or without reasonable accommodation, can perform the essential functions of the employment position that such individual holds or desires.” 42 U.S.C. §12111(8); 29 C.F.R. §1630.2(m). Several courts have found it inconsistent to claim total disability in one forum and then claim an ability to work in another; and the courts have applied the doctrine of judicial estoppel to bar the discrimination claims. (Judicial estoppel exists where a party assumes inconsistent positions in different judicial tribunals).

Taking the opposite view, in Overton v. Reilly, 977 F.2d 1190 (7th Cir. 1992), the Seventh Circuit explained that “disability” has differing definitions in the social security act and in the ADA; thus, a claim for social security disability is not necessarily inconsistent with a discrimination claim under the ADA or the Rehabilitation Act. Most recently, the Seventh Circuit reaffirmed its view that the receipt of Social Security disability benefits does not preclude ADA relief because the two Acts employ quite different standards, procedures and objectives. However, the receipt of social security benefits is relevant and where the allegations made to social security [or to a disability insurer] are completely inconsistent with the ability to work, the court will apply judicial estoppel. Haschmann v. Time Warner Entertainment Co., 151 F.3d 591 (7th Cir. 1998).

That position, which was accepted by the Equal Employment Opportunity Commission in a policy statement (EEOC Notice 915.002, 2/12/97), states that representations made in an application for social security benefits should not automatically defeat an ADA claim. Instead, the EEOC recommends a case by case approach to consider whether the specific representations made in the social security disability claim are actually inconsistent with a discrimination claim.

The Supreme Court also accepted a case by case approach in Cleveland v. Policy Management Systems, 119 S.Ct. 1597 (1999), which held that an application for Social Security disability benefits does not automatically preclude a claim for disability discrimination. However, the Court cautioned that allegations in the disability claim application may reflect a severe enough disability to lead to summary judgment for the employer if the condition is clearly one that cannot be accommodated.

The ADA has also been invoked to prohibit insurers from discriminating against victims of AIDS or other discrete conditions. Although in World Insurance Co. v. Branch, 966 F.Supp. 1203 (N.D.Ga. 1997), the court ruled that an insurer could not cap benefits for AIDS treatment, finding that such disparate treatment was in violation of the provisions of the ADA (Title III) protecting against discrimination in providing goods and services, the Seventh Circuit recently issued a contrary decision. In Doe v. Mutual of Omaha Insurance Co., 179 F.3d 557 (7th Cir. 1999), the court held that the ADA only requires that a benefit be provided; the amount of that benefit could not be regulated. Thus, so long as the health insurance plan at issue covered treatment for AIDS, a cap on benefits that was clearly below the actual cost of treatment was deemed not to violate the ADA.

Another area in which the ADA has prohibited what would otherwise be lawful under ERISA involves claims for infertility treatment. Using Illinois as an example, state law mandates group insurance plans to cover the expense of treatment for infertility. However, that requirement is not binding on self-funded plans which are not governed by state insurance laws. Nonetheless, the Americans with Disabilities Act may preclude an insurer from refusing coverage for infertility treatment. Last term, the U.S. Supreme Court, in Bragdon v. Abbott, 118 S.Ct. 2196 (1998), ruled that the inability to reproduce and have children is a protected disability under the ADA. Thus, it may be impermissible discrimination to deny infertility treatment. A federal district court in Chicago ruled that a self-funded insurance plan may be in violation of ERISA for excluding such treatment. Bielicki v. City of Chicago, 1997 WL 260595 (N.D.Ill. 1997). Further litigation on this subject will no doubt be forthcoming.

Coverage for Medical Treatments Deemed Experimental

There has also been a considerable amount of litigation relating to coverage for experimental treatments that are deemed by the claimant’s physicians to be lifesaving. The majority of cases have involved high dosage chemotherapy in connection with autologous bone marrow transplant or peripheral stem cell rescue.

The outcome in such cases will often turn on the specific language of the insurance plans. The more specific the definition of “experimental”, the more likely it is that the insurance plan will prevail in its interpretation. Further, if the insurance plan confers discretion on the plan administrator to issue determinations and benefit plan interpretations, there is a greater likelihood that the plan will prevail. Smith v. CHAMPUS, 97 F.3d 950 (7th Cir. 1996). In Smith, the court ruled that it was reasonable for the plan to have made its decision based on several medical studies, while the plaintiff failed to present authoritative medical authority in support of her position.

Another approach to these cases is to challenge the benefit denial under the ADA. In Henderson v. Bodine Aluminum Co., 70 F.3d 958 (8th Cir. 1995), the ADA was used to challenge an insurer’s approval of high dosage chemotherapy for some conditions while rejecting it for other forms of cancer.

An illustration of the tragedy of limiting treatment in these cases is Bushman v. State Mutual Life Insurance Company, 915 F.Supp. 945 (N.D.Ill. 1996). In that case, a man suffering from terminal cancer was denied treatment with high dosage chemotherapy on the grounds that the treatment was being administered as part of a research protocol. The court regretfully held that the terms of the insurance plan allowed the insurance company to deny payment, commenting with irony that the plan would have paid indefinitely for conventional chemotherapy, which failed to remediate plaintiff’s condition; and on the ground that the treatment was being administered by one of the top treatment centers in the country and was not “voodoo or alternative medicine.”

Medical Necessity

Another hot issue in ERISA claims is medical necessity. In an era of managed care, review of claims for medical necessity has become a hot issue of contention between insureds, providers, and the health plan administrators. Some useful decisions in this area have limited the discretion afforded plan administrators in making such decisions. For example, Crocco v. Xerox Corp., 956 F.Supp. 129 (D.Conn. 1997); aff’d in part, rev’d in part, 137 F.3d 105 (1998), involved the use by Xerox of a third party administrator to administer mental health claims. A plan participant’s treating doctor had recommended a certain course of treatment, which the refused to authorize. When challenged in court, the plan administrator defended itself by arguing that it relied on the expertise of the third party administrator; however, this defense was rejected by the district court (and affirmed by the court of appeals). The court ruled that Xerox’s plan administrator erred by blindly accepting the opinions of its consultant, without weighing the evidence on both sides of the issue. Under ERISA, it is an improper delegation of fiduciary responsibility to abdicate decision-making responsibility to an organization that was deemed not to have any fiduciary liability under ERISA.