Issue exhaustion in ERISA claim appeals It is a generally accepted tenet in litigation under the Employee Retirement Income Security Act that claimants challenging benefit denials must first exhaust prelitigation claim appeals as a condition precedent to filing suit.[1] While an administrative exhaustion requirement applies to claim exhaustion, whether ERISA claimants are barred from raising new issues in court that were not previously asserted in their claim appeals remains open to question.

The U.S. Supreme Court ruled last month in the case of Carr v. Saul[2] that issue exhaustion is not mandatory in Social Security disability benefit claims. The Carr ruling also has implications for ERISA litigation. The main issue decided in Carr was whether Social Security disability benefit claimants forfeited their ability to challenge the validity of the appointments of the administrative law judges who presided over their hearings by not raising the issue during administrative proceedings. The question regarding Social Security administrative law judge appointments was triggered by the Supreme Court’s 2018 ruling in Lucia v. U.S. Securities and Exchange Commission,[3] which found that administrative law judges within the SEC had not been constitutionally appointed. The court held the nature of administrative law judge duties required that they be appointed by the president or agency heads in accordance with the appointments clause of the U.S. Constitution.[4]

In Carr, the court recognized the general rule in adversarial litigation is that arguments not timely raised are generally deemed waived. However, that rule does not apply in inquisitorial proceedings such as Social Security hearings, which are not deemed adversarial. The Supreme Court explained in its 2000 decision Sims v. Apfel: the rationale for requiring issue exhaustion is at its greatest [when] the parties are expected to develop the issues in an adversarial administrative proceeding [but] the reasons for a court to require issue exhaustion are much weaker [when] an administrative proceeding is not adversarial.[5] Despite the differences between Social Security claims and ERISA benefit claims, the Carr ruling has relevance to ERISA litigation. While ERISA litigation is adversarial, the statute is paternalistic and provides for a “full and fair review” of benefit denials as a precondition to claimants being allowed to litigate disputes over benefits.[6] The detailed claim regulations promulgated by the U.S. Department of Labor[7] reinforce the principle that the duties imposed on plan administrators are fiduciary in nature[8] and plan administrators are required to clearly inform claimants of what evidence they need to submit in order to perfect their benefit claims.[9] Such requirements are comparable to similar requirements mandated under the Social Security Act, which impose on administrative law judges a duty to “ensure that the administrative record is fully and fairly developed.”[10]

Even prior to Carr, though, multiple court rulings held that issue exhaustion by claimants is not required in ERISA cases and that only claim exhaustion is mandatory. For example, the U.S. District Court for the Eastern District of Arkansas’ 2008 decision in Pearson v. Group Long Term Disability Plan for Employees of Tyco International Inc.[11] followed the U.S. Court of Appeals for the Third Circuit’s 1984 ruling in Wolf v. National Shopmen Pension Fund,[12] which held “Section 502(a) of ERISA does not require either issue or theory exhaustion; it requires only claim exhaustion.” In Pearson, the U.S. District Court for the Eastern District of Arkansas, Western Division, also relied on an earlier Social Security decision that addressed issue exhaustion, Sims v. Apfel,[13] and cited the U.S. Court of Appeals for the Tenth Circuit’s 2004 finding in Gaither v. Aetna Life Insurance Co. that ERISA, like the Social Security Act, was meant “‘to provide a non-adversarial method of claims settlement.'”[14] The Tenth Circuit’s Gaither ruling also explained that under ERISA, a plan administrator does not “play a role like that of a judge in a purely adversarial proceeding.”[15] The U.S. Court of Appeals for the Ninth Circuit took the same approach a few months after Pearson’s issuance in Vaught v. Scottsdale Healthcare Corp. Health Plan,[16] which also relied on Social Security principles.

That same theme was echoed by the Supreme Court in Metro Life Insurance Co. v. Glenn[17] in 2008, where the court pronounced:

ERISA imposes higher-than-marketplace quality standards on insurers. It sets forth a special standard of care upon a plan administrator, namely, that the administrator “discharge [its] duties” in respect to discretionary claims processing “solely in the interests of the participants and beneficiaries” of the plan,[18] it simultaneously underscores the particular importance of accurate claims processing by insisting that administrators “provide a ‘full and fair review’ of claim denials,”[19] and it supplements marketplace and regulatory controls with judicial review of individual claim denials.[20]

Another 2012 Ninth Circuit ruling, Stephan v. Unum Life Insurance Co. of America,[21] held that even if a claimant is represented by an attorney during the prelitigation claim appeal process, the parties are not adversarial at that point and communications between claim handlers and in-house insurance company attorneys are not privileged.

The court determined the prospect of post-decisional litigation is not enough to exempt such communications from the fiduciary exception to attorney-client privilege. That doctrine permits disclosure of communications between attorneys and plan fiduciaries during the claim process based on ERISA’s disclosure requirements. Hence, because the ERISA claims process is not an adversarial proceeding, and especially since many claimants appeal claim denials without legal representation, it would be unfair to hold claimants to a standard that penalizes them for not exhausting issues that are subsequently raised in court. While ERISA imposes an obligation on plan administrators to state all relevant reasons for a claim denial,[22] and bars defendants from raising post hoc rationales in litigation,[23] since ERISA claim appeals are non-adversarial, there is no justification for imposing an issue exhaustion requirement on claimants for whose benefit the ERISA law was enacted. The Supreme Court’s ruling in Carr v. Saul reinforces that principle.

Mark DeBofsky is a shareholder at DeBofsky Law. Disclosure: Mr. DeBofsky represented the plaintiffs in Holmstrom v. Metro Life InsuranceCo. and Stephan v. Unum Life Insurance Company of America, cited in this article.

This article was first published in Law360 on May 4, 2021.

[1] But see, Wallace v. Oakwood Healthcare , 954 F.3d 879 (6th Cir. 2020) (Thapar, J. concurring) (questioning judicially created doctrine of administrative exhaustion of ERISA claims).

[2] Carr v. Saul, 2021 U.S. LEXIS 2109, 2021 WL 1566608 (S.Ct. April 22, 2021).

[3] Lucia v. SEC, 585 U.S. ––––, 138 S.Ct. 2044, 201 L.Ed.2d 464 (2018).

[4] Article II, § 2, cl. 2 of the U.S. Constitution, known as the Appointments Clause, states: [The President] shall have power, by and with the advice and consent of the Senate, to make treaties, provided two thirds of the Senators present concur; and he shall nominate, and by and with the advice and consent of the Senate, shall appoint ambassadors, other public ministers and consuls, judges of the Supreme Court, and all other officers of the United States, whose appointments are not herein otherwise provided for, and which shall be established by law: but the Congress may by law vest the appointment of such inferior officers, as they think proper, in the President alone, in the courts of law, or in the heads of departments.

[5] Sims v. Apfel, 530 U.S. 103, at 110, 120 S. Ct. 2080 (2000).

[6] 29 U.S.C. § 1133.

[7] 29 C.F.R. § 2560.503-1.

[8] 29 U.S.C. § 1104 imposes fiduciary obligations on plan administrators.

[9] See, Holmstrom v. Metro. Life Ins. Co ., 615 F.3d 758 (7th Cir. 2010).

[10] Social Security HALLEX § I-2-6-56.

[11] Pearson v. Group Long Term Disability Plan for Employees of Tyco Intl. Inc., 538 F.Supp. 2d. 1073, 1085-86 (E.D.Ark. 2008).

[12] Wolf v. National Shopmen Pension Fund, 728 F.2d 182, 186 (3d Cir. 1984).

[13] Sims v. Apfel, 530 U.S. 103, 109, 120 S.Ct. 2080, 147 L.Ed.2d 80 (2000).

[14] Gaither v. Aetna Life Ins. Co ., 394 F.3d 792, 807 (10th Cir. 2004).

[15] Id.

[16] Vaught v. Scottsdale Healthcare Corp. Health Plan, 546 F.3d 620 (9th Cir. 2008).

[17] Metro Life Insurance Co. v. Glenn, 554 U.S. 105, 115 (2008).

[18] 29 U.S.C. § 1104(a)(1).

[19] Firestone, 489 U.S., at 113, 109 S. Ct. 948, 103 L. Ed. 2d 80 (quoting 29 U.S.C. § 1133(2)).

[20] 29 U.S.C. § 1132(a)(1)(B).

[21] Stephan v. Unum Life Ins. Co. of Am., 697 F.3d 917 (9th Cir. 2012).

[22] 29 U.S.C. § 1133; 29 C.F.R. § 2560.503-1(g)(1)(i)

[23] See, e.g., Halpin v. W.W. Grainger, Inc. , 962 F.2d 685, 696 (7th Cir. 1992). The rationale behind prohibiting plan administrators from advancing post hoc rationales is that if they were allowed to do so, the requirement of administrative exhaustion in ERISA cases would become pointless.

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