One of the key requirements under ERISA is that litigation of denied benefit claims is generally deemed premature unless the claimant has exhausted pre-suit appeal rights and been given a “full and fair review.”

The basis of that requirement is found in 29 U.S.C. § 1133, which mandates that denied claims receive a full and fair review. To supplement the statutory requirement, the U.S. Department of Labor has issued regulations, found at 29 C.F.R. § 2560.503-1, which spell out attributes of the claim appeal process necessary to achieve a full and fair review.

The requirements include sufficient time for the claimant to submit an appeal; deadlines for responding to claim appeals; the necessity of having different individuals involved in the claim appeal than the ones who rendered the initial decision; mandatory disclosure of all documentation relevant to the claim decision; and specific information that must be included in the claim determination and appeal determination letters.

The regulations mandate only one appeal, but provide that benefit plans are authorized to provide additional voluntary appeals. If such appeals are provided, they must truly be voluntary and plans may not allege a failure to exhaust administrative remedies if the claimant chooses not to participate. 29 C.F.R. § 2560.503-1(c)(3).

The regulation also provides that any limitations periods are to be tolled if the claimant participates in a voluntary appeal. However, the regulations do not spell out whether the procedural protections of mandatory appeals must be utilized in the voluntary appeal process.

In DaCosta v. Prudential Ins.Co. of America, 2010 U.S.Dist.LEXIS 120511 (E.D.N.Y. Nov. 12, 2010), a district court in New York ruled that in the absence of a specific directive in the regulations, plans offering voluntary appeals do not have to provide a “full and fair review.”

The plaintiffs in DaCosta filed a putative class action on the issue of ERISA’s applicability to “voluntary” pre-suit claim appeals.

The plaintiffs asserted that while ERISA does not require more than one appeal, if additional appeals are allowed, the insurer should be required to comply with ERISA’s rules and regulations in the same manner as initial appeals. Prudential disagreed.

Specifically, the plaintiffs complained that Prudential should not have had the same claims personnel involved in conducting and consulting on the voluntary appeal. The plaintiffs also complained that Prudential failed to inform claimants that voluntary appeals were not subject to ERISA rules.

The court found that the plaintiffs stated a claim based on a lack of “sufficient information” regarding the scope of the voluntary appeals.

Citing 29 C.F.R. 2560.503-1(c)(3)(iv), the court cited ERISA’s requirement that insurers offering voluntary appeals provide “sufficient information relating to the voluntary level of appeal to enable the claimant to make an informed judgment about whether to submit a benefit dispute to the voluntary level of appeal.”

The court determined that Prudential failed to provide information to claimants considering participation in a voluntary appeal on “the applicable rules, the claimant’s right to representation, the process for selecting the decision maker, and the circumstances, if any, that may affect the impartiality of the decision maker.” 29 C.F.R. 2560.503-1(c)(3)(iv). Hence, the court found the notification insufficient.

However, the court disagreed with the plaintiffs that ERISA requires the same compliance with the regulations for mandatory appeals set out at 29 C.F.R. § 2560.503-1.

The court concluded that a “plain reading of § 1133(2) supports that ERISA requires only a single mandatory review – as both parties, in fact, concede. Conversely, nothing in the text supports that ‘every’ opportunity an insurer affords must be ‘reasonable,’ or that ‘every’ review an insurer offers must be ‘full and fair.'”

Moreover, the court ruled that because the regulations imposing the full and fair review requirement are written in the singular, there is no justification for mandating the claim appeal requirements to be written in the plural so as to be applicable to claim appeals.

Finally, the court noted that the subsection of the regulations regarding voluntary appeals, § 2560.503-1(c)(3), contains no substantive guidelines as to how such appeals are to be conducted.

Specifically, the court found that the subsection “says nothing about insurers needing to employ ‘reasonable procedures,’ nor does it require insurers to conduct a ‘full and fair review.'” Thus, the court found no ban precluding the assignment of decision makers who have previously been involved in the claim.

The court also found support for its ruling in “public policy.” The court ruled that courts should not impose additional burdens on a party who does more than the law requires.

The court deemed it consistent with ERISA’s policy of encouraging informal dispute resolution to allow voluntary appeals without formal procedural safeguards, stating, “Voluntary appeals provide an additional avenue for insureds to seek relief, before turning to slow and expensive litigation.”

The court found claimants were protected despite limited safeguards because voluntary appeals toll the statute of limitations. However, without the safeguards afforded by the regulations for mandatory appeals, for a claimant to obtain relief through voluntary appeals becomes a more arduous task.

Therefore, DaCosta is a puzzling ruling that has disturbing implications.

Echoing an 8th Circuit case, Price v. Xerox Corp., 445 F.3d 1054 (8th Cir. 2006), which ruled that voluntary appeals do not have to utilize the same time frames as mandatory appeals, DaCosta creates a disincentive for employees to participate in voluntary appeals, even though the courts have expressed as a policy underlying the requirement that claimants engage in pre-suit appeals that such appeals encourage the voluntary resolution of claims without court intervention. Cf. Wilczynski v. Lumbermens Mutual Casualty Co., 93 F.3d 397, 402 (7th Cir. 1996).

By excusing plans from offering claimants adequate procedural safeguards, the “voluntary” appeal gives insurers the opportunity to shore up a defective denial while the claimant receives no advantage at all.

Thus, while claimants might otherwise welcome an additional opportunity to persuade the insurer of the merits of a claim, this ruling creates a disincentive to do so.

Even more troubling, though, is that most benefit plans will not give claimants the opportunity to review and comment on adverse evidence collected after the claim appeal is submitted, a practice sanctioned by cases such as Metzger v. Unum Life Ins.Co. of America, 476 F.3d 1161 (10th Cir. 2007).

While it is understandable that courts taking such a position do so based on a rationale that the claim appeal process could otherwise become an endless cycle before it reaches finality, the 7th Circuit noted in Halpin v. W.W. Grainger, Inc., 962 F.2d 685, 689 (7th Cir. 1992), “[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.” (citations omitted).

Therefore, the voluntary claim appeal process, if offered with reasonable procedural safeguards, would give claimants the opportunity to challenge the appeal decision without having to immediately resort to litigation. Indeed, that is the primary public policy at stake. If claimants are denied that right, it will no doubt lead to more litigation that could otherwise have been prevented.

(Note: I represented the appellant in the Wilczynski v. Lumbermens case cited in this article.)

This article was initially published in the Chicago Daily Law Bulletin.

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