Individuals seeking disability, life, accidental death, or even health benefits under employer-sponsored group benefit plans governed by the Employee Retirement Income Security Act (ERISA) may have their claims thwarted due to what is known as either the “arbitrary and capricious” or “abuse of discretion” standard of judicial review.  Few people understand what those terms mean, though, or how courts decide cases under that standard.

This blog is intended to explain what the term “arbitrary and capricious” is about and how to challenge an unfair or improper claim denial.

What Does the Arbitrary and Capricious Standard of Review Mean in Relation to ERISA Cases?

Although there is no provision in the ERISA law that specifies the standard under which courts decide employee benefit cases, a 1989 Supreme Court decision, Firestone Tire & Rubber Co. v. Bruch, ended up having an enormous impact on benefits litigation under ERISA.  Although the case involved a dispute over entitlement to severance benefits, the Court chose to tackle the issue of how courts are to go about deciding all types of ERISA benefit cases.

The Supreme Court pronounced that in most instances, courts will apply a judicial standard known as de novo review, meaning that the adverse claim determination will be decided by the court without any predisposition in favor of one side or the other.  However, the Supreme Court chose not to make the de novo standard universal and held that the abuse of discretion/arbitrary and capricious standard of review would apply so long as the benefit plan contained language sufficient to grant the authority to the party deciding the claim to interpret the plan/insurance policy provisions and render benefit determinations.  In lay terms, this means the court places a thumb on the scale in favor of the insurance company or plan administrator.  As a result, most claimants would be shocked to learn that when the arbitrary and capricious standard of review applies, they could still lose despite convincing the court that the unfavorable decision was wrong.  If they fail to also prove the decision was not just wrong but also arbitrary and capricious, the insurance company wins.

Obviously, that means claimants are placed at a disadvantage from the outset of the litigation if the arbitrary and capricious standard is applied by the court.  Indeed, according to a study from the Health Policy Institute comparing the outcome of ERISA benefit cases under the two standards of review, claimants won only 28% of the time when the court reviewed the decision under the arbitrary and capricious standard, but were successful in 68% of cases brought under de novo review.

In more formal terms, in applying the arbitrary and capricious standard, in the case of Motor Vehicle Manufacturers Assn. of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., the Supreme Court explained that courts are to examine whether there is a “rational connection between the facts found and the choice made.” In assessing a determination’s rationality, courts are to look at whether the determination “failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before [it] or is so implausible that it could not be ascribed to a difference in view.” Reframing that analysis, the U.S. Court of Appeals for the Seventh Circuit, in Hess v. Hartford, explained:

[A] plan administrator’s decision should not be overturned as long as (1) “it is possible to offer a reasoned explanation, based on the evidence, for a particular outcome,” (2) the decision “is based on a reasonable explanation of relevant plan documents,” or (3) the administrator “has based its decision on a consideration of the relevant factors that encompass the important aspects of the problem.

When Is the Arbitrary and Capricious Standard Applicable?

As a result of the Firestone case, courts may not automatically apply the arbitrary and capricious standard of review.  It may only be applied if the plan (policy) contains language that grants discretionary authority to decide the claim.  And even then, approximately 20 states have prohibited disability, life/accidental death, and health insurance plans that are fully insured from containing provisions that would trigger the application of the arbitrary and capricious standard.  Moreover, if the grant of discretionary authority is made to a party other than the one who decided the claim (i.e., discretion is granted to an employer-based benefits committee, but the claim decision is made by an insurance company), the arbitrary and capricious standard would be inapplicable.

In order to discern whether a plan/policy contains language that would trigger an arbitrary and capricious standard of review, it should contain language comparable to the following language suggested in the case of Herzberger v. Standard Insurance Company – “Benefits under this plan will be paid only if the plan administrator decides in his discretion that the applicant is entitled to them.” Although it is possible to have a court apply the arbitrary and capricious standard of review without the word “discretion” appearing in the plan/policy, it is difficult to draft equivalent language and convince the court of the sufficiency of such language.

How to Defeat an Arbitrary and Capricious Claim Denial?

Benefit claimants face a major challenge to prove to a court’s satisfaction that a  benefit denial was arbitrary and capriciousI, but not impossible.  If the plan takes inconsistent positions or ignores critical evidence, the claim decision is likely to be overturned.  As a result of the Supreme Court’s decision in Metropolitan Life Insurance v. Glenn, courts must also consider whether the plan acted under a conflict of interest.  In most instances, there is an inherent structural conflict present where the same party is responsible for funding the benefit payment and is also deciding whether claimants receive benefits.  However, even in the presence of a conflict, the conflict may only be relevant if there is a basis for raising the court’s suspicion that the conflict tainted the outcome, although the conflict may prove to be a “tiebreaker” if the evidence is evenly divided.  Courts have also found it to have been arbitrary and capricious for an insurer to employ a “moving target;” i.e., telling the claimant the claim will be paid if the claimant can provide a particular piece of evidence and then demanding something additional after the claimant complies.

This list is by no means exhaustive.  The bottom line is that the court needs to be convinced that there was no reasonable basis for the claim denial based on the evidence presented.

Since the Supreme Court has countenanced the ongoing viability of the arbitrary and capricious standard of review and because Congress has failed to impose a uniform standard, claimants will continue to face a daunting hurdle in the efforts to obtain benefits.  Claimants need the support of an experienced ERISA attorney who can identify arbitrary decision-making and who has a proven record of assisting claimants in proving a claim denial is arbitrary and capricious.

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