Deadlines carry little weight if there are no repercussion for missing them.
Take the case of Gatti v. Reliance Standard Life Insurance Co., 2005 U.S.App.LEXIS 9895 (9th Cir., May 31), which involved a claimant who received disability benefits for nearly seven years due to complications of Hepatitis B. The insurer cut off benefits in 2000, claiming that the Hepatitis B had been inactive since 1997, and the plaintiff was disabled thereafter due to bipolar disorder and chronic fatigue syndrome, which allowed benefit payments to terminate after two years, a period that had already been exhausted.
When Terri Gatti appealed that determination, Reliance Standard Life Insurance Co. had Dr. Steven Feagin review the file. And 177 days after the appeal was submitted, the insurer reaffirmed its denial, but invited the submission of additional evidence. The plaintiff then submitted new test results showing the continued presence of active hepatitis; however, 279 days later, Reliance upheld its decision, finding the new evidence insufficient.
Gatti then filed suit and was successful under a de novo standard of review applied by the U.S. District Court for the District of Arizona based on the insurer’s failure to issue a timely appeal determination and due to a conflict of interest demonstrated by the insurer’s failure to give deference to the treating doctor’s opinion.
The 9th U.S. Circuit Court of Appeals reversed.
The court acknowledged that the ERISA regulations (both those in effect when the claim arose as well as the current ones) contain deadlines by which appeals must be decided or the decision is ”deemed denied,” although currently, the regulations speak of a deemed exhaustion allowing the claimant to proceed to court. See 29 C.F.R. §2560.503-1(l). Although the 9th Circuit decided in Jebian v. Hewlett Packard Co., 310 F.3d 1173 (9th Cir. 2002) (withdrawn and replaced by 349 F.3d 1098 (9th Cir. 2003)) that the plan’s failure to comply with appeal deadlines could result in a loss of discretion, the court noted that Jebian remains under consideration for review by the Supreme Court. Further, the court was careful to note the holding in Jebian was based on the plan’s failure to comply with the time limits set forth in the plan and not necessarily due to any violation of ERISA regulations.
Thus, the court ruled: ”We reject Gatti’s suggestion that once a benefits administrator has violated the regulation’s time limitation, the ‘deemed denied’ language operates to cut off the administrator’s discretion, making de novo review appropriate. Instead, we read the ‘deemed denied’ language to provide beneficiaries with a ‘final decision’ from which to appeal if the administrator has not made a decision within the timelines established in the regulation. Because a claimant must exhaust her plan’s administrative review procedures before she may bring suit in federal court, Amato v. Bernard, 618 F.2d 559, 566-68 (9th Cir. 1980), a mechanism is necessary to allow claimants access to the courts in the event that their plan never makes a decision. Thus, the ‘deemed denied’ language gives claimants the ability to access the courts if the administrator does not exercise its discretion within a reasonable time (as established by the regulations).”
Hence, the court made it clear that the only consequence for tardy decision-making is that the claimant gets to go to court without having to further exhaust appeals. The court further interpreted the plaintiff’s conduct in continuing to submit evidence to Reliance after the 120 day deadline as showing that she did not even ”deem” Reliance to have denied the claim.
The court then added, with respect to its holding that the plan suffers no consequence for a late appeal: ”Nothing in the history of ERISA or its regulations, nor in the precedent that binds us, indicates that the ‘deemed denied’ language is a temporal restriction on the administrator’s discretion. We reject the interpretation of ‘deemed denied’ advanced by Gatti and accepted by the District Court and interpret the ‘deemed denied’ language to mean only that Gatti could have brought her lawsuit after the time limits expired. Instead, she chose to continue participating in Reliance’s claims review process until, as an act of discretion, Reliance denied her appeal.”
The court went further, though, in addressing whether the plaintiff would need to suffer substantive harm before a substantive remedy could be afforded for a tardy appeal determination. Applying an earlier case, Blau v. Del Monte Corp., 748 F.2d 1348 (9th Cir. 1984), where the court found ”wholesale and flagrant” procedural violations caused substantive harm to the claimant, the court ruled that procedural violations do not alter the standard of review, ”unless those violations are so flagrant as to alter the substantive relationship between the employer and employee, thereby causing the beneficiary substantive harm.”
Thus establishing that the arbitrary and capricious standard of review was to be applied in this case, the 9th Circuit rejected the secondary basis for altering the standard of review – that the benefit denial was infected by a conflict of interest. The appeals court found that the district judge determined the existence of a conflict of interest because the plan refused to give deference to the treating physician’s opinion, but the case of Black & Decker v. Nord, 538 U.S. 822 (2003), eliminated the underpinning of that determination in its holding that automatic deference to the treating doctor was unwarranted in ERISA claims. Hence the court remanded the case for the judge to assess it under a deferential standard of review – ”[u]nless the District Court concludes that de novo review is nonetheless justified based on other evidence of substantive harm.”
When the current set of ERISA claim regulations was originally published in the Federal Register in 1998, there was an explicit provision providing for a loss of discretion in the event of tardy appeal determinations. That language was removed; however, the provision at 29 C.F.R. §2560.503-1(h)(2) states that denial of the procedures afforded by the regulations constitutes a failure to provide a ”full and fair review” as mandated by 29 U.S.C. §1133. See also 29 C.F.R. §2560.503-1(h)(4) (”The claims procedures of a plan providing disability benefits will not, with respect to claims for such benefits, be deemed to provide a claimant with a reasonable opportunity for a full and fair review of a claim and adverse benefit determination unless the claims procedures comply with the requirements of paragraphs (h)(2)(ii) through (iv) and (h)(3)(i) through (v) of this section.”).
The Department of Labor also explained, ”A plan’s failure to provide procedures consistent with these standards would effectively deny a claimant access to the administrative review process mandated by the act. Claimants should not be required to continue to pursue claims through an administrative process that does not comply with the law. At a minimum, claimants denied access to the statutory administrative review process should be entitled to take that claim to a court under section 502(a) of the act fora full and fair hearing on the merits of the claim.” (Emphasis added.) 65 Fed. Reg. 70246, 70256 (Nov. 21, 2000), modifying 29 C.F.R. ‘§ 2560.503-1 (Nov. 21, 2000); see also 29 C.F.R. § 2560.503-1(l).
Thus, a loss of discretion, in addition to the right to proceed to court, was clearly intended by the Department of Labor since the whole concept of a ”full and fair hearing on the merits of the claim” means plenary review, not a deferential standard of review.
The consequence of this decision is that benefit plans have no incentive to meet the Department of Labor’s time limits in deciding appeals because there is no penalty or consequence for non-compliance. Of course, this decision holds that claimants can go to court if the appeal deadline is breached. However, that is a hollow remedy since most courts have a preference for remanding cases to the insurer, and any plan participant who files suit once the appeal deadline passes without a decision from the insurer is likely to end up having the case sent back to the insurer for further review rather than having the claim adjudicated.
Gatti has now been without benefits for five years; for the court to characterize what occurred here as a technical violation fails to recognize that for a disabled claimant whose benefits have been terminated, causing a disruption of financial resources required to meet the basic necessities of life, what harm can be more substantive than having her benefits decision delayed? The court thus seems to lose sight of the whole purpose of disability insurance, which is to protect one’s financial security in the event illness or accident causes an inability to work.
Finally, nowhere in this decision is there any discussion of a reasonable excuse put forward by Reliance Standard explaining its delay, likely on account of the insurer having failed to advance any justifiable excuse. This case exemplifies the insurer’s ”wholesale and flagrant” disregard for a claimant’s rights under 29 U.S.C. §1133. Hopefully, the District Court acts speedily on remand to enter a finding that Reliance Standard acted arbitrarily and capriciously in terminating the plaintiff’s benefits.
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This article was initially published in the Chicago Daily Law Bulletin.