One of the major differences between insurance litigation in general and litigation of disputes involving health, life or disability insurance under the ERISA law is in relation to preconditions to bringing suit. Even though ERISA cases are not subject to administrative law, federal courts have incorporated the doctrine of administrative exhaustion into ERISA litigation.
The ERISA law (Employee Retirement Income Security Act, 29 U.S.C. Sec.1001, et seq.) is implicated any time a claim is brought under a benefit plan provided to private-sector employees as a fringe benefit of their employment. Only public employees and employees of religious entities are exempt.
Within the purview of administrative law, when an administrative claim is denied, the aggrieved party must first exhaust certain specified administrative appeals as a condition of proceeding to court. For example, victims of employment discrimination are required to file a charge of discrimination with the Equal Employment Opportunity Commission or analogous state agency and be given a right to sue in order to proceed to federal or state court. Likewise, social security disability claimants must receive a determination from an administrative law judge and then obtain final administrative review before they are permitted to seek judicial review of a claim denial.
Under ERISA, there is no explicit statutory requirement of administrative exhaustion. Nor is ERISA litigation governed by the federal Administrative Procedure Act. On the contrary, the ERISA law contains a provision that authorizes aggrieved claimants to bring a civil action to recovery benefits claimed due — 29 U.S.C. Sec.1132(a)(1)(B).
However, following the ERISA law’s enactment in 1974, courts began issuing decisions requiring exhaustion as a precondition to filing suit. In the 7th U.S. Circuit Court of Appeals, the seminal ruling in that regard is Kross v. Western Electric Co., Inc., 701 F.2d 1238 (7th Cir. 1983), which viewed exhaustion as a “firmly established policy.” One reason suggested as the basis for the exhaustion requirement is that another ERISA provision states that claimants whose benefits have been denied are entitled to a “full and fair review” of the denial — 29 U.S.C. Sec.1133. While the precursor to the ERISA law enacted in 1974 envisioned an administrative tribunal to adjudicate pension benefit denials to fulfill that mandate, that provision was ultimately dropped from the final bill.
A recent ruling issued by a federal court in New York discussed the consequences of a claimant’s failure to exhaust administrative remedies prior to filing suit. Ruderman v. Liberty Mutual Group, 2021 WL 827693 (N.D. N.Y., March 4), was brought by Jennifer Ruderman, who suffered a head injury in a bicycle crash and was initially approved to receive disability benefit payments. However, her benefits were terminated after Liberty Mutual required her to attend a neuropsychological examination and the results did not support an ongoing impairment within the policy terms. Ruderman failed to appeal the benefit termination and filed a lawsuit instead. The court ruled that her failure to appeal barred her from proceeding with the case.
Ruderman illustrates the importance of recognizing the distinction between ERISA cases and other types of insurance litigation. When Liberty moved to dismiss Ruderman’s case on exhaustion grounds, the plaintiff responded by claiming an appeal would have been futile, which is a legitimate ground to bypass an appeal if futility can be established. However, the court rejected Ruderman’s defense, finding “the mere fact that Liberty Mutual might have been likely to deny the claim does not excuse exhaustion … In other words, the mere denial of a claim is not de facto evidence of the futility of filing a formal appeal.” Hence, the court concluded that Ruderman “failed to make any showing, nevermind a clear and positive showing, that exhausting her administrative remedies would have been futile…” (internal quotations omitted). Accordingly, her case was dismissed with prejudice.
It is likely that Ruderman was correct that an appeal would have been futile — her benefits were terminated because her claimed disabling condition was reclassified from cognitive impairment due to brain trauma to functional mental impairment. The policy limited the duration of benefit payments for purely psychiatric disabilities, which is not only permissible but nearly ubiquitous since mental health parity laws apply only to health insurance. On the other hand, perhaps Ruderman could have supplied evidence that might have convinced Liberty that her disabling impairment was exclusively due to brain trauma and thus exempted from the limitation.
There is a much broader issue presented here that the court never addressed, though. A concurring opinion authored by Judge Amul Thapar issued in Wallace v. Oakwood Healthcare, Inc., 954 F.3d 879 (6th Cir. 2020), expressed serious doubt about the administrative exhaustion doctrine in ERISA litigation. Thapar wrote:
“It is troubling to have no better reason for a rule of law than that the courts made it up for policy reasons. Yet that seems to be the case with ERISA’s exhaustion requirement. Federal courts should reconsider when — or even whether — it’s legitimate to apply this judge-made doctrine.”
Thapar challenged the legitimacy of a judge-created doctrine and whether it was permissible for the judiciary to impose extra-statutory requirements on ERISA claimants and observed:
“It should bother us that such a ubiquitous doctrine, one that has thwarted many an employee’s efforts to enforce his benefit rights, rests on such shaky foundations. Maybe there are better arguments waiting to be made. But if there are, they’ve been waiting a long time.”
Thapar’s challenge to administrative exhaustion of ERISA claims suggests that courts should revisit the legitimacy of applying a judge-made extra-statutory doctrine that precluded Jennifer Ruderman from having her day in court.
Mark DeBofsky is a shareholder at DeBofsky Sherman Casciari Reynolds PC.
This article was first published by Chicago Daily Law Bulletin on March 18, 2021