A production supervisor for an engineering company sought disability benefits after aggravating a back injury when he fell down a flight of stairs.

Plaintiff Alfredo Ruiz applied for benefits from Continental Casualty Co. and submitted certification from his attending physician, who reported that due to physical limitations, Ruiz ”may not work.” Additional records were later submitted from a second treating doctor, who suggested limited functional abilities, and given that evidence, the claim was approved based on the insurer’s recognition that Ruiz could not perform his usual duties.

However, after two years of payment, the definition of ”disability” changed to a more general requirement of an inability to engage in any job. Believing that Ruiz failed to meet that standard, Continental terminated payments even though Ruiz had undergone implantation of a spinal cord stimulator due to uncontrollable pain.

Ruiz pursued his claim for continued benefits in the federal courts, and the 7th U.S. Circuit Court of Appeals ruled against him in March. Ruiz v. Continental Casualty Co., 400 F.3d 986 (7th Cir. 2005).

Because the claim involved employee benefits, the court found the Employee Retirement Income Security Act controlled the disposition of the case. The court noted that a summary plan description distributed to employees listed the employer as plan administrator and stated that the administrator has discretion to interpret the plan and determine eligibility and entitlement to benefits. In addition, a ”certificate” issued to each employee stated, ”We [defined in the policy to mean Continental] have authority to determine your [defined as the employee] eligibility for benefits and to interpret the terms and provisions of the policy.” However, from the report of decision, it appears the policy itself lacked any comparable provision.

The appeals court first addressed the standard of review appropriate to consideration of Continental’s determination under the ERISA law. The court found the analysis had two parts:

  • Was Continental a fiduciary?
  • Were the fiduciaries granted discretionary authority?

The court initially determined that Continental was a fiduciary pursuant to 29 U.S.C. §1002(21)(A), which defines a ”fiduciary” as any person who ”exercises any discretionary authority or discretionary control respecting management of such plan or exercises any authority or control respecting management or disposition of its assets, (ii) renders investment advice for a fee or other compensation, direct or indirect, with respect to any moneys or other property of such plan, or has any authority or responsibility to do so, or (iii) has any discretionary authority or discretionary responsibility in the administration of such plan.”

The court then held that the exercise of control or authority over a benefit constitutes fiduciary action, relying heavily on Aetna Health Inc. v. Davila, 124 S.Ct. 2488 (2004), where the Supreme Court ruled that health maintenance organizations, when administering employee benefit plans, ”must make discretionary decisions regarding eligibility for plan benefits and, in this regard, must be treated as plan fiduciaries.” The court concluded that classifying ”any entity with discretionary authority over benefits determinations as anything but a plan fiduciary would conflict with ERISA’s statutory and regulatory scheme.”

Turning to the grant of discretion, the appeals court found that the ”certificate” constituted a plan document and that the certificate language was sufficient to reserve discretionary authority. The court rejected the plaintiff’s argument that neither the summary plan description, the certificate nor the policy was a plan document that could vest Continental with discretionary authority. Plaintiff argued that Wallace v. Reliance Standard, 318 F.3d 723 (7th Cir. 2003) supported a conclusion that a contract of insurance sold to a plan is not itself the ”plan.” However, the court found that argument contrary to other authority, including the Supreme Court’s ruling in Pegram v. Herdrich, 530 U.S. 211 (2000), upon which Wallace relied, which recognized that a contract between an insurer and an employer ”can be part of a plan.”

The court also noted that in Postma v. Paul Revere, 223 F.3d 533 (7th Cir. 2000), and in Houston v. Provident Life and Accident Insurance Co., 390 F.3d 990 (7th Cir. 2004), insurance policies were found to constitute plan documents from which discretionary authority could be discerned, and that other circuits had reached the same conclusion: Ross v. Rail Car Am. Group Disability Income Plan, 285 F.3d 735, 739 n.5 (8th Cir. 2002); Cinelli v. Sec. Pac. Corp., 61 F.3d 1437, 1441 (9th Cir. 1995); Gable v. Sweetheart Cup Co., 35 F.3d 851, 856 (4th Cir. 1994); Musto v. Am. Gen. Corp., 861 F.2d 897, 900-01 (6th Cir. 1988); see also Shaw v. Conn. Gen. Life Ins. Co., 353 F.3d 1276, 1282-83 (11th Cir. 2003) (treating an insurance policy as plan document).

Consequently, the court found the certificate and policy to be plan documents granting the requisite discretionary authority.

Once it found discretionary authority, the 7th Circuit explained how a discretionary standard of review works in practice: ”It is not enough that we might disagree with a fiduciary’s decision concerning benefits; we cannot overturn a decision to deny benefits unless the decision was ‘downright unreasonable.'” Citing Blickenstaff v. R.R. Donnelley & Sons Co. Short Term Disability Plan, 378 F.3d 669, 677 (7th Cir. 2004). Applying that standard, the court held that Continental’s decision was not ”downright unreasonable” since there was no ”objective evidence” supporting a conclusion that Ruiz was incapable of performing even sedentary work – Ruiz was deemed to have offered only subjective complaints of pain.

The court also characterized the attending physicians’ reports as ”somewhat inconsistent,” since one physician suggested that Ruiz could perform jobs that allowed for limited sitting, standing and walking, and another reported that Ruiz would be able to return to work a short time after the date of her report. The court also found that the doctor who reported on the spinal cord stimulator was merely reciting Ruiz’s pain complaints, which the court found were insufficient to constitute objective evidence as required by the policy. Accordingly, the court sided with Continental.

This decision significantly departs in important respects from prior 7th Circuit rulings. First, the conclusion that the ”certificate” affords discretion is fundamentally at odds with 7th Circuit precedent as well as the ERISA statute.

The 7th Circuit ruled in Health Cost Controls of Illinois Inc. v. Washington, 187 F.3d 703, 711 (7th Cir. 1999), cert. denied, 528 U.S. 1136, 120 S.Ct. 979 (2000), that when a conflict exists between the policy and a summary plan description, the terms of the policy control. That decision serves as the basis for numerous lower court rulings holding that when a summary plan description or a certificate, but not the policy, invokes discretionary language while the plan or policy itself is silent on the matter, that creates a conflict resulting in a denial of discretion. Reinertsen v. Paul Revere Life Insurance Co., 127 F.Supp. 1021, 1030 (N.D. Ill. 2001). Also see, Flood v. Long Term Disability Plan for First Data Corp., 2002 U.S. Dist. LEXIS 18183 (N.D. Ill., Sept. 27, 2002); Billings v. Continental Casualty, 2003 U.S. Dist. LEXIS 796 (N.D. Ill., Jan. 21, 2003); Bolden v. Unum Life Insurance Company of America, 2003 U.S. Dist. LEXIS 3288 (N.D. Ill., March 4, 2003) (language in ”certificate” but not in policy; therefore, no discretion allowed); Paulson v. Paul Revere Life Insurance Co., 323 F.Supp.2d 919 (S.D. Iowa 2004) (same); Wolff v. Continental Casualty Co., 2004 U.S. Dist. LEXIS 24643 (N.D. Ill., Sept. 28, 2004) (discretionary language in certificate insufficient); Mullaly v. Boise Cascade Corporation Long Term Disability Plan, 2005 U.S. Dist. LEXIS 387 (N.D. Ill., Jan. 11, 2005) (same); Akhtar v. Continental Casualty Co., 2002 U.S. Dist. LEXIS 5393 (N.D. Ill) (discretionary language in plan description insufficient); Carter v. General Electric, 2001 U.S. Dist. LEXIS 1724, 26 EBC 1166 (N.D. Ill.). Also see, Shaw v. Connecticut General Life Insurance Co., 353 F.3d 1276 (11th Cir. 2003)(same).

These rulings also make logical sense because the summary plan description is just that – a summary. The summary can only describe duties, responsibilities, rights and remedies that are found in the governing plan document. That is why it is significant that nowhere in the Ruiz decision is there any discussion about what language is contained in the policy, even assuming that the policy constitutes the plan. Presumably, the policy at issue in Ruiz is similar to the policy in Wolff and Mullaly and does not contain discretionary language, which means that granting discretion in this case appears to have been inappropriate.

However, there is an even more serious potential flaw in the Ruiz analysis. Even if the insurer seeks to rely on language contained in the insurance contract reserving discretion, the ERISA statute contains far more stringent requirements before discretionary authority may be granted. Discretion depends on proper delegation of discretionary authority pursuant to 29 U.S.C. §1105(c)(1), which states:

”(c) Allocation of fiduciary responsibility; designated persons to carry out fiduciary responsibilities.

”(1) The instrument under which a plan is maintained may expressly provide for procedures (A) for allocating fiduciary responsibilities (other than trustee responsibilities) among named fiduciaries, and (B) for named fiduciaries to designate persons other than named fiduciaries to carry out fiduciary responsibilities (other than trustee responsibilities) under the plan.”

Because that provision was not considered in Ruiz, a crucial step in the analysis was omitted. After recognizing that discretionary authority depends on fiduciary status, the court was required to determine whether Continental was expressly made a ”named fiduciary.” For an insurer to become a named fiduciary with discretion, the sponsor of the benefit plan must first reserve discretion and then delegate it to that named fiduciary in an appropriate plan instrument.

The insurer has no authority to simply give itself discretion in a document it creates. Doing so violates section 402(a)(1) of ERISA, which states: ”Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.” 29 U.S.C. §1102(a)(1).

The next provision in the statute is even more crucial since it requires that any ”named fiduciary” has to be identified as such either ” (A) by a person who is an employer of employee organization with respect to the plan or (B) by such an employer and such an employee organization acting jointly.” 29 U.S.C. §1102(a)(2).

The plan also must ”describe any procedure under the plan for the allocation of responsibilities for the operation and administration of the plan (including any procedure described in section 405(c)(1) [29 U.S.C. §1105(c)(1)].” 29 U.S.C. §1102(b)(2).

Under these requirements, it is therefore improper for the insurer to simply vest itself with discretion – the ERISA law contemplates that discretion may be accorded to an insurer acting in a fiduciary capacity only when the employer first reserves discretion and then delegates it in an appropriate plan instrument.

Applying these principles, Madden v. ITT Long Term Disability Plan, 914 F.2d 1279, 1283-84 (9th Cir. 1990), explained that a discretionary standard of review may only be applied where ”(1) the ERISA plan expressly gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan and (2) pursuant to ERISA, 29 U.S.C. §1105(c)(1) (1988), a named fiduciary properly designates another fiduciary, delegating its discretionary authority.”

Although an argument can be made that the purchase of an insurance policy identifying the insurer as a party having discretion impliedly satisfies these requirements, that seems contrary to the entire scheme of ERISA, which presumes the existence of a ”plan” that, in turn, may seek to be funded through insurance according to 29 U.S.C. §1002(1). However, many, if not most, health and disability benefit plans offered by employers are nothing more than insurance policies, leaving out the intermediate step of an overarching plan that identifies and sets forth the duties of each of the named fiduciaries. As Madden points out, though, as a condition for granting discretion to determine eligibility to receive benefits, an express delegation of discretionary authority is required; implied authority is not enough.

Although this argument may suggest excessive formalism, just as the courts have ruled that it is simple and therefore required that plans seeking discretionary authority draft plan language that is clear and unambiguous, it would be just as easy to draft language that unmistakably shows compliance with section 1105(c)(1). Otherwise, it is not at all discernible that the plan sponsor had the intent to delegate discretion to the party seeking to exercise discretion.

The 7th Circuit has already made this clear by pointing out in Herzberger v. Standard Insurance Co., 205 F.3d 327 (7th Cir. 2000), the key case in the circuit regarding discretion in ERISA plans: ”An employer should not be allowed to get credit with its employees for having an ERISA plan that confers solid rights on them and later, when an employee seeks to enforce the right, pull a discretionary judicial review rabbit out of his hat. The employees are entitled to know what they’re getting into, and so if the employer is going to reserve a broad, unchanneled discretion to deny claims, the employees should be told about this, and told clearly.”

Instead of ”employer” in the foregoing quote, read ”insurer” in conjunction with the requirements of 29 U.S.C. §§1102 and 1105 to see that the discretionary authority needs to be clearly spelled out, not just implied.

Of course, this entire discussion raises the question of why insurers even stand in such a privileged position under the ERISA law as to be allowed discretionary authority to determine claims.

The Supreme Court ruled in Firestone Rubber & Tire Co. v. Bruch, 489 U.S. 101 (1989), that discretionary authority can be created in any ERISA plan by simply drafting the appropriate language, and the lower courts have no choice but to follow the Supreme Court’s ruling absent legislative changes, which have yet to come.

However, it is hard to understand any rational policy justification for allowing insurers to receive the benefit of an arbitrary and capricious standard of review given that they stand in an inherent conflict as both the payor of benefits and as the party who determines claim payment. Moreover, granting insurers discretion appears to conflict with the statement of ERISA’s purpose expressed by Congress in the preamble to the statute, which speaks of helping employees to secure their rights and remedies under employee benefit plans. The ERISA law also prohibits exculpatory clauses that purport ”to relieve a fiduciary from responsibility or liability for any responsibility.” 29 U.S.C. §1110(a).

Although Congress has not yet seen fit to address this issue, prohibiting insurance companies from receiving discretionary authority is amenable to state action based on traditional state regulatory authority over the content of insurance policies. Moreover, an exception to ERISA preemption found in 29 U.S.C. §1144(b) gives authority to the states to regulate insured benefit plans so long as the states do not supplement or supplant ERISA remedies as enumerated in 29 U.S.C. §1132(a) or otherwise interfere with substantive provisions of the ERISA statute.

Acting within that authority, the Illinois Department of Financial and Professional Regulation, Division of Insurance, recently published in the Illinois Register (Feb. 14, 2005) a proposed rule prohibiting discretionary clauses in all accident and health insurance policies, a category that includes disability insurance. Such a rule would restore de novo review as the default and only standard in claims involving insured plans.

Indeed, Firestone clearly expressed a view that arbitrary and capricious review should be the exception. However, in reading Ruiz, it appears that the rule has been swallowed by the exception. As Herzberger points out, discretionary clauses have the effect of giving employees less protection under ERISA than they would enjoy if their claims were outside the scope of ERISA. This is a paradox that has vexed courts and litigants sinceFirestone was issued more than 15 years ago.

Finally, Ruiz too hastily determined that the claim was unsupported by objective evidence and in its analysis of the evidence presented. First, despite ruling in Quinn v. Blue Cross & Blue Shield, 161 F.3d 472 (7th Cir. 1998), that vocational analysis is important in determining disability claims, the court gave no consideration to whether the medical opinions describing Ruiz’s restrictions were compatible with the ability to perform any occupation. The lack of ”objective” evidence issue is also problematic.

As cases such as Mitchell v. Eastman Kodak, 113 F.3d 433 (3d Cir. 1997), teach, it would be unfair to require a claimant to provide objective evidence when there is no laboratory test that can measure pain and because it would defeat the insured’s legitimate expectations to deny benefits under such circumstances. Both Cook v. Liberty Life Assurance Company of Boston, 320 F.3d 11 (1st Cir. Feb. 5, 2003), and Lemaire v. Hartford, 2003 U.S. App. LEXIS 13421 (3d Cir., June 30, 2003) (unpublished), also held that imposing an objective proof requirement on claimants could be unreasonable since it raises the evidentiary bar too high in cases where medical testing is unable to measure symptoms such as pain and fatigue.

Moreover, Ruiz does not comport with the 7th Circuit’s rulings in both Hawkins v. First Union Corp. Long-Term Disability Plan, 326 F.3d 914 (7th Cir. 2003), and Carradine v. Barnhart, 360 F.3d 751 (7th Cir. 2004), which recognized that severe pain can be disabling, and ruled that if subjective complaints are disregarded, claimants might be unable to prove disability.

919. Objective evidence is also more than X-rays and blood tests, and may be shown by clinical observations on examination. Russell v. Unum, 40 F.Supp.2d 747 (D. S.C. 1999), observed that clinical findings constitute ”objective” evidence. Certainly, if Ruiz was a candidate for implantation of a spinal cord stimulator, he obviously presented clinical findings of severe pain justifying the surgical implantation of such a device.

The largest disability program in the world utilizes clinical findings to prove disability. In Social Security disability claims, proof of disability due to a spinal impairment may be shown by submitting ”evidence of nerve root compression characterized by neuro-anatomic distribution of pain, limitation of motion of the spine, motor loss (atrophy with associated muscle weakness or muscle weakness) accompanied by sensory or reflex loss and, if there is involvement of the lower back, positive straight-leg raising test (sitting and supine).” Listing §1.04 of the Social Security Listing of Impairments, 20 C.F.R., Appendix 1.

While none of the foregoing is objective in the same manner as an X-ray or MRI, such evidence is clinically based and deemed reliable by the Social Security Administration. Presumably, if a spinal cord stimulator was medically required, Ruiz met many of the foregoing requirements. Further, the need for surgery to implant the spinal cord stimulator obviously negates the insurer’s reliance on an earlier medical opinion that Ruiz was expected to improve. Accordingly, the dismissal of Ruiz’s claim based on a lack of objective evidence should be revisited in future cases.

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