The question of why group long-term disability insurance policies are governed by the Employee Retirement Income Security Act (ERISA) was recently answered in Gross v. Sun Life Assur. Co. of Canada, 2013 U.S.App.LEXIS 17059 (1st Cir. Aug. 16, 2013).

That case involved Diahann Gross, an optician who became disabled in 2006 due to complex regional pain syndrome, fibromyalgia, migraines and chronic fatigue.

After filing suit in state court when her benefit claim was denied, the case was removed to federal court on grounds of ERISA pre-emption, which the plaintiff challenged. The plaintiff cited ERISA’s regulatory “safe harbor” provision that excludes “group or group-type insurance programs” from ERISA’s oversight if they satisfy four criteria:

1) The employer makes no contributions on behalf of its employees

2) Participation in the program is voluntary

3) The employer’s sole functions are to collect premiums and remit them to the insurer, and, without endorsing the program, to allow the insurer to publicize the program to its employees

4) The employer receives no consideration for its efforts, other than reasonable compensation for administrative services necessary to collect premiums. (See 29 C.F.R. Section 2510.3-1(j).)

In addition, a plan may still be exempted from ERISA if it lacks the “five essential constituents” of an ERISA plan:

1) A plan, fund or program 2) established or maintained 3) by an employer or by an employee organization, or by both 4) for the purpose of providing medical, surgical, hospital care, sickness, accident, disability, death, unemployment or vacation benefits, apprenticeship or other training programs, day care centers, scholarship funds, prepaid legal services or severance benefits 5) to participants or their beneficiaries.

The critical inquiry is “whether the purchase of the insurance policy constituted an expressed intention by the employer to provide benefits on a regular and long-term basis.” ERISA governs if, from the perspective of a reasonable person, the court is able to “ascertain the intended benefits, a class of beneficiaries, the source of financing and procedures for receiving benefits.” Id. at 1082.

Applying those tests, the court found that Gross’ employer established or maintained an employee welfare benefit plan or program. The court determined there was no question that “Pinnacle [plaintiff’s employer] undertook to provide benefits for its employees “on a regular and long-term basis.” Although Pinnacle’s employees, including Gross, paid premiums for long-term disability insurance coverage themselves, the 1st Circuit agreed with the conclusion “that Pinnacle’s package of insurance benefits constituted a unitary ERISA program.”

Since Pinnacle was responsible for enrollment and coverage was tied to employment, the court refused to “unbundle” one benefit from a comprehensive package of benefits offered to employees.

The court also rejected the safe harbor exception because the employer “endorsed” the long-term disability (LTD) plan and thus “played more than a bystander’s role concerning the LTD policy.” Among supporting authorities cited was ERISA Op. Letter No. 94-26A (July 11, 1994) (stating that endorsement occurs “if the [employer] engages in activities that would lead [an employee] reasonably to conclude that the program is part of a benefit arrangement established or maintained by the [employer]”). Accordingly, the plan was found governed by ERISA.

The next issue for the court’s consideration was the applicable standard of court review. Although the de novo standard is applied as the default when courts review ERISA benefit claim denials, if the benefit plan reserves discretionary authority to itself to determine claims, the deferential arbitrary and capricious standard is triggered according to Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989).

Sun Life claimed the deferential standard applied because the policy stated, “Proof [of claim] must be satisfactory to Sun Life” and “Benefits are payable when Sun Life receives satisfactory Proof of Claim.” According to Brigham v. Sun Life of Canada, 317 F.3d 72 (1st Cir. 2003), that language was found sufficient to indicate subjective discretionary authority.

However, the court decided the time had come to reverse Brigham because the “precedential landscape” had changed. Although some circuits have adhered to a conclusion that the requirement of submission of “satisfactory proof” suffices, a clear majority of circuits disagree. The court thus deemed the “satisfactory proof” language a “far cry” from other explicit provisions that had determined a deferential standard of review in other cases.

Relying on other circuits’ rulings, the court determined that the “satisfactory to us” language was too indefinite to inform the claimant that the insurer had reserved discretionary authority. The court cited Feibusch v. Integrated Device Tech., Inc. Emp. Benefit Plan, 463 F.3d 880, 884 (9th Cir. 2006) and Diaz v. Prudential Ins. Co. of Am., 424 F.3d 635, 639 (7th Cir. 2005) and concluded: “We are persuaded primarily by the ambiguity of the phrase, which reasonably may be understood to state Sun Life’s right to insist on certain forms of proof rather than conferring discretionary authority over benefits claims.”

The court then turned to a discussion of the merits. The plaintiff’s proof included multiple doctor reports and a functional capacity evaluation finding less than sedentary work capacity and an inability to maintain sustained work activity. Sun Life presented nine days of video surveillance – Gross was inactive on most of the days, but did some shopping and driving on three days.

A neurologist was also retained by Sun Life to examine Gross. He initially found the plaintiff disabled but changed his opinion after being shown the surveillance video. Describing the conflicting evidence, the court found the medical evidence persuasive, along with a functional capacity evaluator’s finding that the plaintiff gave “maximal effort” on testing.

Corroborative witness statements from co-workers and her employer also supported Gross’ “persistence in continuing to work despite obvious pain and compromised physical capacity.” However, the surveillance gave the court concern. Thus, the court found a remand was appropriate.

The court’s willingness to overturn Brigham is the centerpiece of this ruling, even though the 6th U.S. Circuit Court of Appeals, when recently given the chance, refused to do the same in Frazier v. Life Ins. Co. of North America, 2013 U.S.App.LEXIS 16078 (6th Cir. August 5, 2013). The court also set out a primer on basic ERISA concepts and clearly explained why plans that are nothing more than insurance policies are governed by ERISA.

Editor’s note: DeBofsky represented the plaintiffs in both the Feibusch and Diaz cases cited in the Gross ruling.

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