Do claimants for Employee Retirement Income Security Act-governed disability benefits have to fully exhaust claim appeals before filing suit?

That question was answered in June by the U.S. Court of Appeals for the Second Circuit in McQuillin v. Hartford Life and Accident Insurance Co.,[1] which overturned the dismissal of the case by the U.S. District Court for the Eastern District of New York and held that an insurer’s failure to issue a definitive benefit determination within the time limits prescribed by the U.S. Department of Labor’s ERISA claim regulations[2] constituted a “deemed exhaustion,” meaning that any exhaustion requirement was deemed fulfilled, and the plaintiff would be permitted to proceed directly to court.

The plaintiff, John McQuillin, initially applied for disability benefits from Hartford in September 2019 on account of side effects he was experiencing from treatment he was receiving for prostate cancer. McQuillin’s claim was denied, however; and McQuillin appealed the denial in accordance with the procedures set forth in the U.S. Department of Labor’s claim regulations.

Twelve days after its receipt of McQuillin’s appeal, Hartford notified McQuillin that it had overturned the denial. However, instead of issuing a benefit payment, Hartford advised McQuillin that it was forwarding his file to its claims department to determine whether his claimed disability was supported and cautioned that payment was not guaranteed.

When Hartford failed to take any further action thereafter, after 46 days had elapsed following submission of the claim appeal, McQuillin filed suit against Hartford.

The Second Circuit framed the issue on appeal as follows: “[T]he dispositive question in this appeal is whether a valid benefit determination on review must determine whether a claimant is entitled to benefits.” The court held that in accordance with the language of the regulation, as well as the regulation’s structure and purpose, a determination is required to state whether the claimant is entitled to benefits.

Because Hartford failed to meet that requirement, the claimant’s obligation to exhaust appeals prior to filing a lawsuit ended after 45 days.

The court first examined the text of the regulation, which states, “[t]he plan administrator shall provide a claimant with … notification of a plan’s benefit determination on review” within 45 days.[3] Although the phrase “benefit determination” is undefined in the regulations, the court concluded that the regulation requires a benefit determination, not an appeal determination, and that the plan administrator must definitively decide whether the claimant is entitled to benefits within 45 days of receipt of the claim appeal.

The court resorted to the dictionary to illuminate the meaning of the word “determination.” Merriam-Webster’s Collegiate Dictionary first defines the word as “a judicial decision settling and ending a controversy.” The court also cited Black’s Law Dictionary, which contained a nearly identical definition.

Hartford also conceded the regulation required that it issue “a final decision no more than 45 days after” the appeal is received, which the court interpreted as “implicitly acknowledging that the determination had to be a final denial or grant of benefits.” The court added, “An outcome that does not determine benefits cannot be a ‘benefit determination.'”

The court next examined the structure of the regulation and concluded the appeal process is clearly intended to result in a final determination of benefits. The court expressed concern that Hartford’s remand to its claim department could result in an indefinite delay.

Finally, the court looked at the regulation’s history and purpose. The court pointed out that the ERISA regulations were intended to limit the number of reviews claimants are obligated to seek prior to filing suit.[4] Thus, the additional step of further review after the issuance of a favorable appeal determination was held to be inconsistent with the regulation.

Hartford maintained that the procedures it employed were necessary and consistent with the flexibility it needed to possess in administering plans. While the court partly agreed and acknowledged that administrators are entitled to flexibility in administering benefits, the Second Circuit concluded the need for flexibility cannot outweigh the purpose of the regulation to limit the number of appeals a claimant must pursue.

Hence, the court determined that Hartford was obligated to decide McQuillin’s entitlement to benefits within 45 days of his appeal submission, and the failure to do so rendered the duty to appeal exhausted after 45 days elapsed without a benefit determination.

This ruling was an easy call for the Second Circuit. When claimants appeal benefit denials, they expect to receive a determination that either approves benefits or upholds the denial. Instead, what McQuillin received was neither. The appeal was rendered pointless if the insurer could take a second bite at the appeal and still deny the claim after overturning the initial denial.

The court of appeals found it obvious that the regulations require a benefit determination, and that an appeal determination that fails to resolve the issue of entitlement to benefits is noncompliant with the requirements of the regulation.

Thus, Hartford’s failure to determine whether McQuillin was entitled to benefits within 45 days of its receipt of the claim appeal triggered the “deemed exhaustion” provision of the regulation. The regulation states:

[I]n the case of the failure of a plan to establish or follow claims procedures consistent with the requirements of this section, a claimant shall be deemed to have exhausted the administrative remedies available under the plan and shall be entitled to pursue any available remedies under section 502(a) of the Act on the basis that the plan has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim.”[5]

In other words, the claimant is free to immediately file a lawsuit in the event of deemed exhaustion.

Other provisions of the regulation relating specifically to disability benefits are even more draconian as to plan administrators since a deemed exhaustion exists if “the plan fails to strictly adhere” to the requirements of the regulation; and as a result “the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.”[6]

Thus, in the event of a deemed exhaustion, the court adjudicates the case under the de novo standard of judicial review.

Other cases that have found a deemed exhaustion when the plan administrator fails to decide the claim in a timely manner include Fessenden v. Reliance Standard Life Insurance Co.,[7] in which the U.S. Court of Appeals for the Seventh Circuit in 2018 ruled that a tardy decision following the submission of a claim appeal met the exhaustion requirement and mandated de novo review.

However, in Wallace v. Oakwood Healthcare Inc.,[8] decided in 2020 by the U.S. Court of Appeals for the Sixth Circuit, a concurring opinion authored by Judge Amul Thapar went even further and questioned whether exhaustion was even required since it is a judge-created doctrine that is not even mentioned in the ERISA statute.

These issues will continue to be examined by the courts, but in the meantime, the clear lesson taught by the McQuillin ruling is that the deadlines for deciding claims and appeals contained in the ERISA claim regulations have teeth and there are consequences when a plan administrator fails to comply with those deadlines by issuing a timely benefit determination.

The lesson is even broader, though. While going through the claim appeal process rather than going straight to litigation may seem tedious, it can often be beneficial for claimants since it can lead to a faster resolution of a claim. However, even though the ERISA claim regulations place stringent time limits on responses from plan administrators, the delay can often be interminable.

The McQuillin ruling is a reminder that because claimants seeking disability benefits are unable to work and are usually reliant on disability payments for financial support, plan administrators need to act in a timely manner in determining whether benefits are payable. If litigation is inevitable, though, claimants need to be promptly informed that they may proceed to court without delay.

The McQuillin ruling is instructive to plan administrators, too. The ruling notified plan administrators that they must establish procedures that ensure the issuance of benefit decisions that meet the time frames specified in the regulations. The failure to comply in this matter resulted in litigation that likely could have been averted and almost certainly will not be repeated.

Mark D. DeBofsky is a shareholder at DeBofsky Law.

This article was first published by Law 360 on June 28, 2022.

[1] McQuillin v. Hartford Life and Acc. Ins. Co., 2022 U.S. App. LEXIS 15618, 2022 WL 2029879 (2nd Cir. June 7, 2022).

[2] 29 C.F.R. § 2560.503-1.

[3] 29 C.F.R. § 2560.503-1(i), (j).

[4] Citing Employee Retirement Income Security Act of 1974; Rules and Regulations for Administration and Enforcement; Claims Procedure, 65 Fed. Reg. 70,246, 70,253 (Nov. 21, 2000) (preamble).

[5] 29 C.F.R. § 2560.503-1(l)(1) (emphasis added).

[6] 29 C.F.R. § 2560.503-1(l)(2).

[7] Fessenden v. Reliance Standard Life Ins. Co., 927 F.3d 998 (7th Cir. 2018).

[8] Wallace v. Oakwood Healthcare Inc., 954 F.3d 879 (6th Cir. 2020).

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