The current regime of treating claims administered by health and disability insurers in the same manner as pension benefit claims has proven to be a recipe for disaster. First and foremost on the agenda for fixing the current system is the need to improve the communications provided to plan participants and their beneficiaries. Judge Richard Posner wrote in Herzberger v. Standard Insurance Company, 205 F.3d 327, 332-33 (7th Cir. 2000),
- 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.
Insurers desperately strive to receive a deferential standard of review because it so dramatically raises the evidentiary bar for plaintiffs who need to prove the insurer’s decision was not just wrong but “downright unreasonable” in order to prevail. Despite Herzberger’s admonition that the reservation of discretion has to be clearly spelled out, insurers are still getting away with convincing courts that the use of policy language requiring submission of “satisfactory proof,” or that benefits will be paid when the insurer “determines” that certain enumerated conditions have been met, is sufficient to reserve discretion. Clearer communication is therefore definitely called for.
Further, there is yet another related issue that has evaded careful scrutiny. Insurers are vesting themselves with the discretion to determine claims and are being granted a deferential standard of review despite the absence of any indication that the plan sponsor reserved discretion in the first instance and then delegated it. The careful statutory interplay between 29 U.S.C. §1102 and §1105(c) requires such documentation, yet it is rarely found in practice. Such requirements need to be more clearly spelled out.
Nor should insurers, who serve as the de facto plan administrator, be allowed to evade liability by naming the plan sponsor as the plan administrator. If an insurer is administering benefits, it should be required to name itself as plan administrator and be subject to suit as a party defendant under 29 U.S.C. §1132(d).
Because so many ERISA welfare benefit claims are determined under a deferential standard of review, with a resulting scope of review that limits the evidence the court will consider, claimants need more information when their claim is first denied so they can better appreciate the importance of the claim appeal process. For plans that have only one level of review, it is crucial to notify plan participants of that fact and advise them in unmistakable, easily understood language that they should consult with an attorney. This is important because the failure to either participate in an appeal or to conduct the appeal properly will result in adverse consequences in litigation. Claimants also need to be clearly informed of their right to receive, free of charge, the entire contents of the claim file. Of equal importance, though, is that claimants must be advised that their right to submit any issues, comments, or evidence will likely be cut off once they submit their appeal, making it mandatory that all issues and evidence be presented as part of the appeal.
It is equally important to communicate what the plan can and cannot do during the course of the appeal. A recent district court ruling, Neiheisel v. AK Steel Corporation, 2005 U.S.Dist.LEXIS 4639 (S.D. Ohio 2/17/2005), held that a disability plan may not have a claimant examined after a benefit denial — the regulations state that plans may consult with experts, but that does not afford an opportunity for the plan to develop evidence to support the claim denial after the fact when such evidence should have obtained prior to the claim determination. Likewise, claimants should be notified and given the right to comment on any evidence received by the plan during the appeal process. In Abram v. Cargill, Inc., 395 F.3d 882 (8th Cir. 2005), the court faulted a disability plan for not allowing the claimant the opportunity to respond to a medical report that ultimately was used as the basis for the claim denial.
Even more needs to be done, though. With restrictions on discovery, claimants are left with no means of trying to prove potential bias or raise questions about the validity of evidence developed by a plan. In Semien v. Life Insur.Co. of North America, 2004 U.S.Dist.LEXIS 6759 (N.D.Ill. 4/20/2004), the court precluded the plaintiff from learning about the financial relationship between the insurer and its consultants. Such basic information should be provided during the claim process – claimants have a right to know if their claim is being decided based on advice rendered by consultants who either lack relevant knowledge or who are financially beholden to the plans for their livelihood. Life and death decisions turn on these factors; and the case of Bedrick v. Travelers Insurance Company, 93 F.3d 149 (4th Cir. 1996) is a prime example of how exposure of bias and incompetence reversed an improper denial of crucial therapies prescribed for a child suffering from cerebral palsy. Other rare cases in which discovery was allowed have revealed such important facts as that consultants have reviewed over one thousand files per year on behalf of a single insurer. These are facts that claimants need to know.
Claimants must also be clearly advised of their right to request claim manuals, protocols, guidelines, training materials and similar documentation. The value of such information was proven in Glista v. Unum Life Insur.Co. of America, 378 F.3d 113 (1st Cir. 2004), where the court of appeals was convinced the insurer acted arbitrarily and capriciously by raising a pre-existing condition exclusion in a manner contrary to its own prior interpretation as documented in a claim manual.
Plan administrators should also be mandated to disclose the date on which it believes the applicable statute of limitations would expire. The case of Mogck v. UNUM Life Insurance Co. of America, 292 F.3d 1025 (9th Cir. 2002) followed such a requirement from California law in holding that contractual limitations periods are not binding if the insurer fails to communicate to the insured when the limitations period expires. When cases such as Skipper v. Claims Services Intl., 2002 U.S.Dist.LEXIS 14200 (D.Mass. 2002) characterize the limitations periods described in insurance contracts as “gobbledegook,” the utility of such a requirement is manifest. The problem is more acute, though, with self-funded plans, many of which have unusually short limitation periods; and claimants should not be put in peril of losing their rights to bring suit under 29 U.S.C. §1132 due to ignorance of the deadline by which suit needs to be filed.
There are two other issues relating to communications that occur during the claims process that also need to be explored. Many courts adjudicating benefit disputes have a preference for remanding the case to the plan to reassess the claim. At present, there are no procedures in place to govern that process, which usually leads to the insurer, rather than the claimant, bolstering a claim denial instead of a process of perfecting a claim approval. The propriety of remands, according to the dissent authored by Judge Diane Wood in Perlman v. Swiss Bank Corp., 195 F.3d 975 (7th Cir. 1999), is questionable as a matter of law since ERISA cases are not administrative law claims like social security disability cases. However, so long as courts are remanding cases, claimants need more protection against insurers who seek to use the remand as an opportunity to repair the defect that made the initial decision arbitrary.
The second issue is unique to the UnumProvident Corporation, the largest disability insurer in the world. As a result of a regulatory settlement agreement reached with the insurance commissioners of nearly all fifty states as well as the Department of Insurance, UnumProvident is in the process of re-evaluating over 200,000 previously denied claims, the vast majority of which are ERISA claims. Both claimants and UnumProvident need to be informed whether the re-evaluation process is subject to the claim regulations or is it sui generis where UnumProvident gets to write all the rules? That also raises a subsidiary question: which regulations apply? If the claim arose prior to 2002, do the older regulations apply or do the current regulations apply. This issue has arisen in several rulings which involve situations where a disability claimant may have qualified for benefits prior to 2002 but had payments terminated subsequent to the effective date of the current regulations. The case of Hackett v. Xerox, 315 F.3d 771 (7th Cir. 2003) suggests the current regulations apply based on its ruling that the “claim” arises when it is contested; however, many insurers take a contrary position, and the case of Wade v. Life Insur.Co. of North America, 271 F.Supp.2d 307 (D.Maine 2003) holds that the pre-2002 regulations apply when the claim was initially brought prior to that date even if the claim dispute arose later.
Finally, non-compliance with the claim regulations by the insurer/plan administrator has to result in penalties. In the original draft of the current revised ERISA claim regulations published in 1998 at 63 FR 48390, there was an explicit penalty for non-compliance by plan administrators—loss of discretion in court. That language was removed; however, the final regulations, at 29 C.F.R. § 2560.503-1(h)(2), state the denial of the procedures afforded by the regulations constitutes a failure to provide a “full and fair review” as mandated by 29 U.S.C. § 1133. See also 29 C.F.R. § 2560.503-1(h)(4) (“The claims procedures of a plan providing disability benefits will not, with respect to claims for such benefits, be deemed to provide a claimant with a reasonable opportunity for a full and fair review of a claim and adverse benefit determination unless the claims procedures comply with the requirements of paragraphs (h)(2)(ii) through (iv) and (h)(3)(i) through (v) of this section.”. The Department of Labor also explained,
- A plan’s failure to provide procedures consistent with these standards would effectively deny a claimant access to the administrative review process mandated by the Act. Claimants should not be required to continue to pursue claims through an administrative process that does not comply with the law. At a minimum, claimants denied access to the statutory administrative review process should be entitled to take that claim to a court under section 502(a) of the Act for a full and fair hearing on the merits of the claim (emphasis added).
65 Fed. Reg. 70246, 70256 (Nov. 21, 2000), modifying 29 C.F.R. § 2560.503-1 (Nov. 21, 2000); see also 29 C.F.R. § 2560.503-1(l). Thus, the loss of discretion penalty appears to have been left in the regulations; however, it needs to be stated more clearly. At present, the federal courts have been inconsistent in dealing with tardy claim decisions. Jebian v. Hewlett Packard Co., 310 F.3d 1173 (9th Cir. 2002), withdrawn and replaced by 349 F.3d 1098 (9th Cir. 2003), hinted at a loss of discretion; other cases have allowed “substantial compliance” with the regulations to suffice, although Nichols v. Prudential Insur.Co. of America, 406 F.3d 98 (2d Cir. 2005) rejected the substantial compliance doctrine. Other courts have simply excused the plan’s tardiness, with the most recent example being Gatti v. Reliance Standard Life Insur.Co., 2005 U.S.App.LEXIS 9895 (9th Cir. 5/31/2005), where the court ruled that unless the late appeal determination results in substantive harm to the claimant, the only consequence of a tardy appeal determination is that the claimant can go to court; the standard of review is unaffected.
The consequence of cases such as Gatti, and the absence of penalties for non-compliance with the claims processing regulations, unlike the $110/day penalty available in 29 U.S.C. §1132(c) for failure to provide information upon request, shows that benefit plans have no incentive to meet the Department of Labor’s time limits in deciding appeals. Coupled with the availability of a deferential standard of review being accorded to insurers who clearly put their profits ahead of the claimant, contrary to their fiduciary duty mandated by 29 U.S.C. §1104(a)(1), the ERISA law creates perverse incentives encouraging denial of meritorious claims. The introduction to the statute speaks of protection of employees’ rights to secure benefits by affording remedies and access to courts (29 U.S.C. §1001(b)), but the last 30 years have seen a nearly uninterrupted progression of systematic deprivation of benefits by insurers who administer welfare benefit programs. There is simply no reconciliation of a recognized principle of insurance law known as contra proferentem (i.e., ambiguities in insurance policies are construed against the drafter) with the discretionary authority to construe policy language in a manner that favors the denial of benefits. Nor do insurers in any other context enjoy the privileges conferred on insurers administering welfare benefit programs, who have been allowed to simply vest themselves with discretion to determine claims, a standard of review that insulates their decisions from penetrating judicial review. The suggestions proposed in this testimony would afford claimants greater rights but would impose no expense on the administration of benefit plans. Nonetheless, these suggestions would go a long way toward protecting claimants, particularly those who face off against insurers who have at least the potential to place their profits ahead of their fiduciary obligations. One of ERISA’s sponsors, Senator Jacob Javits, hailed the law as “the greatest development in the life of the American worker since Social Security.” It is time to restore that promise.