Courts adjudicating ERISA cases have borrowed a standard of judicial review from administrative law known as the arbitrary and capricious standard. Even though the ERISA law is derived mostly from trust law where a trustee’s actions are reviewed for an abuse of discretion, federal courts have substituted the arbitrary and capricious standard to uphold benefit denials.
But what do these terms even mean? And how does the term arbitrary and capricious affect the outcome of a benefit claim brought under ERISA?
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Historical Background of the Arbitrary and Capricious Standard
To understand the meaning of these terms, a historical perspective is required. The ERISA law (Employee Retirement Income Security Act) was passed by Congress in 1974 primary to address problems with the administration of pension benefits and to offer more protection to employees’ retirement income security. When disputes over benefits were first litigated after ERISA’s enactment, some courts adopted a position taken from labor law rulings that courts should defer to the benefit decisions made by the plan trustees. Other courts ruled there was no statutory basis for deference. The issue finally reached the Supreme Court in 1989; and in the case of Firestone Tire v. Bruch, the Court ruled that while there should generally be no deference given to benefit determinations, plans could reserve discretionary authority to interpret benefit plan terms and decide on questions of eligibility to receive benefits. If such a reservation was contained in the benefit plan documents, courts were to apply deference to benefit determinations and overturn the benefit determination only if the denial was deemed arbitrary and capricious.
The degree of deference due was unclear, though. Many courts ruled that a decision by a plan administrator should be upheld unless it was “downright unreasonable.” Clarifying the meaning of that phrase in the case of Holmstrom v. Metropolitan Life Insurance Company, the Seventh Circuit Court of Appeals explained: “The phrase should not be understood as requiring a plaintiff to show that only a person who had lost complete touch with reality would have denied benefits. Rather, the phrase is merely a shorthand expression for a vast body of law applying the arbitrary-and-capricious standard in ways that include focus on procedural regularity, substantive merit, and faithful execution of fiduciary duties.”
In practice, though, the arbitrary and capricious standard of review has presented a near-insurmountable barrier to claimants. Although no formal statistical analysis has ever been performed, anecdotal studies have shown that claimants lose more than 75% of their cases if the arbitrary and capricious standard applies. The reason is obvious – proving the benefit denial was erroneous is not enough to win the case. In addition to meeting an evidentiary burden of proving an entitlement to benefits, claimants must then overcome a second hurdle of establishing the denial was arbitrary and capricious.
How to Prove That a Benefit Denial Is Arbitrary and Capricious
It is difficult for claimants to establish that a benefit denial was arbitrary and capricious – but by no means impossible. And the burden was made a modest degree easier by the Supreme Court’s 2008 ruling in Metropolitan Life Insurance v. Glenn, which held that if the same entity is responsible for deciding a claimant’s entitlement to benefits and for funding the payment, there exists a structural conflict of interest that could favor a denial of benefits. The Supreme Court suggested that a history of biased claim adjudications could be grounds for giving the conflict more weight, or where surrounding circumstances suggest the conflict may have influenced the decision. Other factors that have led courts to conclude a decision was arbitrary and capricious include the following:
- In the Holmstrom case, the court found the insurance company was guilty of “moving the ball,” which meant that the insurer demanded certain evidence, and when it was provided, it was rejected without legitimate reason.
- In the Glenn ruling, the Court found the insurance company engaged in “procedural unreasonableness” by requiring the claimant to apply for Social Security disability benefits, which was financially advantageous to the insurer because its benefit payments would subject to reduction on account of a Social Security award. MetLife even assisted Wanda Glenn in applying for Social Security benefits, but when she won the Social Security case, as soon as MetLife recouped funds, it denied the relevance of the favorable outcome in the Social Security matter. The Supreme Court viewed the insurance company’s actions as having been inconsistent.
Other grounds for finding benefit determinations arbitrary and capricious are when the insurance company uses the wrong occupation in assessing a disability claim or holds the claimant to standards higher than what the policy requires. Numerous disability denials in cases involving fibromyalgia have been overturned when insurance companies have mischaracterized the evidence or relied on medical consultants who refused to believe that anyone could be disabled due to fibromyalgia. Another circumstance that often leads to a finding of arbitrary and capricious decision making is where a disability claim is approved and benefits paid for a significant period of time but then abruptly terminated without any evidence of material improvement in the claimant’s condition. Many courts have also been skeptical of insurers’ reliance on doctors who issue unfavorable determinations by relying solely on a medical record review when all of the clinical examination findings favor the claimant. These examples are by no means exhaustive.
How to Prevent an Arbitrary and Capricious Benefit Denial
It is easier to be proactive in preventing an arbitrary and capricious denial than to overturn a claim decision after it has been made. Claimants must take advantage of their right to appeal a claim denial prior to filing suit by creating a claim record that is “bulletproof.” The case needs to be made so strongly that if the insurance company is reviewing the evidence objectively, it should experience shock and awe upon receipt of the claim appeal. Disability, health, and accidental death insurance cases are exceedingly complex and draw upon a wide variety of medical evidence; and in disability benefit cases, vocational evidence as well. All of the relevant evidence needs to be collected and submitted; and how the evidence is presented is also crucial.
Although claim appeals may be assembled and filed by the claimants themselves, that is often not a good idea. Success is far more likely if the claimant turns to a benefits attorney with the experience and expertise to pull together the necessary evidence and frame the winning arguments. Even if the appeal is not successful, a well put together appeal is decisive in asserting that a claim decision was arbitrary and capricious. By the time a lawsuit is filed, it is usually too late to submit any new evidence or arguments to rebut the insurance company’s reports. Therefore, enlisting an attorney’s assistance immediately after the issuance of a benefit denial is critical to success later.
Final Words
Insurance companies and benefit plan administrators place great value on the arbitrary and capricious standard of review. Claimants can neutralize the advantage an arbitrary and capricious standard of court review affords, however. Courts are not rubber stamps; and the vast majority of judges recognize their obligation to make sure the evidence presented supports the conclusion reached. With the benefit of assistance from an experienced lawyer with the expertise to take on the insurance companies, the arbitrary and capricious standard of court review may be successfully overcome.
