Most of the time you make benefit decisions based on the application of contested facts on uncontested plan terms.

But what happens when decisions are made based upon contested plan terms? When does a plan administrator abuse its discretion when construing plan terms?

Read this case, issued this week: D&H Therapy, LLC and Dolan v. Boston Mutual Life Ins. Co., __F.3d__(1st Cir., April 20, 2011). This case summarizes how courts will review cases involving contested plan terms, and explains the tests applied in various circuits.

FACTS: Dolan was part owner and employee of a chain of physical therapy clinics. She sought ERISA disability benefits. The plan had discretionary language. The plan provided that principals and employees were eligible for benefits if they were “not able to perform the material and substantial duties of their regular occupation” and had “at least a 20% loss in their pre-disability earnings.” The plan defined “pre-disability earnings” as “earnings for the prior calendar year . . .on form W-2, excluding commissions.”

Dolan began receiving benefits, but she failed to disclose monthly ownership income, which placed her above the her pre-disability earnings. With those profits included, the Plan administrator concluded Dolan’s post disability monthly earnings were about $2000 higher than pre-disability earnings, discontinued benefits. The Plan sought reimbursement for about $163,000. A lawsuit followed.

ISSUES:

  1. What test is applied in determining if a plan administrator abused its discretion in construction of a plan term?
  2. What are “earnings” as defined by the plan?

 

1st CIRCUIT COURT OF APPEALS:  Plan Administrator abused its discretion in applying plan terms.

RATIONALE:

  1. The Supreme Court has not spoken directly as to how courts should assess whether an administrator’s construction of a plan term is so unreasonable as to constitute an abuse of discretion. Op. at 20.
  2. In review of a plan’s construction of plan terms, the Seventh, Ninth and District of Columbia Circuits look to the language and purpose of the plan. Op. at 23.
  3. Other circuits apply specific standards in reviewing a plan’s construction of plan terms. Op. at 23-25.
  4. The First Circuit refuses to adopt any specific test. It rejects the plan’s construction of the terms here because:
    • the terms as constructed cannot be used consistently within the entire plan language. Op. at 25-8;
    • the plan’s interpretation renders meaningless other plan language definitions. Op. at 29;
    • the plan did not advocate its present construction of the terms until “more than four years after it had been paying Dolan benefits.” Op. at 30-31; and,
    • If the plan wanted to offer a plan that determine plan eligibility by comparing pre-disability W-2 income with post disability income deriving from employment, it could have drafted much clearer plan language. Op. at 31.

If you practice in the Ninth Circuit, you’ll want to read this one.

Is it an abuse of discretion if the plan fails to have an Independent Medical Examination which includes a “personal examination”?

Until now there has been no Ninth Circuit case stating that the plan abused discretion by failing to have a physician’s “personal examination.” This new decision gives ammo for that argument, and factors considered in finding an abuse of discretion.

Here’s the case of Salomaa v. Honda Long Term Disability Plan, __ F.3d __ (9th Cir. March 7, 2011)(standard of review in conflict cases discussed:The “‘any reasonable basis’ test is no longer good law.” ).

FACTS:

Salomaa was diagnosed with depression and chronic fatigue syndrome and applied for Long Term Disability (LTD) ERISA benefits. The plan had discretionary language. His doctors opined that he could work no more than 5 minutes per day, and noted his 23 pound weight loss. Honda’s claim administrator had two doctor reviews and denied the claim because of “the absence of positive laboratory results or physical findings.” Salomaa’s attorney offered Salomaa up for an exam and for such lab tests as the plan wished to have performed. The plan never responded to this offer. Salomaa appealed and submitted a neuropsych evaluation which showed impairment consistent with chronic fatigue syndrome and a decision from the Social Security Administration granting his disability claim. The appeal was denied and Salomaa sued.

TRIAL COURT: UPHELD CLAIM DENIAL (Applying abuse of discretion standard, taking into plan conflict of interest).

NINTH CIRCUIT: REVERSES with the following key points and quotes

1-Comments about the standard of review. “We have gradually refined and restated our standard of review [and held that] ‘[a] decision is not arbitrary unless it is not grounded on any reasonable basis.'” “This ‘any reasonable basis’ test is no longer good law.” Op. at 3202 (Emph in original).

2-Conflict cases and standard of review. The United States Supreme Court decisions in Glenn and Conkright require deferential review which means that a plan decision “will not be disturbed if reasonable.” BUT “[i]t is much easier to state the words of the formula…than to say what the formula means in practice.” Op. at 3204.

3- What is “reasonable basis”? “‘Reasonableness’ does not mean we would make the same decision…. We must judge the reasonableness of the plan administrator skeptically where, as here, the administrator has a conflict of interests….The conflict of interest requires additional skepticism because the plan acts as judge in its own cause.” Op. at 3204

4-What is “abuse of discretion?” The meaning of abuse of discretion…is “whether ‘we are left with a definite and firm conviction that a mistake has been committed,’ and we may not merely substitute our view for that of the fact finder.” The court will look to whether decision is “illogical, implausible, or without support in inferences” that may be drawn from the record. Op. at 3205-6.

5-The plan abused discretion in many ways. Op. at 3206-14. The reasons are:

(a) every doctor who “personally examined” him found him disabled;

(b) the plan demanded objective tests but no objective tests exist for the condition;

(c) the plan failed to consider the Social Security disability award;

(d) the reasons for denial shifted as they were refuted;

(e) the Plan failed to engage in “meaningful dialogue.” (The plan failed to furnish to Salomaa the physician reviews it obtained.

Op. at 3206-3214

6-Read the dissent by Judge Hall. It has some excellent analysis and key quotes, which include:

A- “To arrive at today’s decision, the majority had to overlook binding precedent and turn a blind eye to inconvenient facts—almost as though it were looking at nothing at all, in a room of total darkness.” Dissent Op. at 3221.

B-“[N]o Ninth Circuit cases state[s] that “personal examination” dictates whether an ERISA plan…abused its discretion.” Id. at 3216.

C- “[T]here is no proof the administrator failed to consider the [SSDI] award, just that there is no proof that it closely and deliberately studied the award.” Id. at 3219.

D -Failure to meaningfully communicate with Salomaa should lessen the discretion but “should not itself substantiate a conclusion that the plan abused its discretion.” Id. at 3220.

The claimant sues the ERISA plan for long term disability benefits, but refuses to reimburse Social Security repayments. What to do? Counterclaim.

Here’s the case of Bigda v Principal Life(D. Mass. February 3, 2011)(court allows plan administrator to pursue counterclaim for reimbursement).

FACTS: Bigda sought long term benefits under an ERISA plan. The administrator counterclaimed and asserted a constructive trust theory seeking reimbursement after Social Security issued benefits. (Bigda had signed a Reimbursement Agreement, promising to “to repay …within 30 days of the date the first money is received from social security.”) Bigda then moved to dismiss the counterclaim.

HELD: Motion to dismiss counterclaim DENIED.

  • The administrator presented the relevant contracts and paperwork confirming the agreement to repay benefits. These facts were sufficient for the plan to state a claim.
  • The Court rejected Plaintiff’s argument that the counterclaim was barred under 42 U.S.C. 407 which protects Social Security payments from being subject to legal process. The Court said: “[T]he funds…Principal is seeking are not the SSDI benefits….Although the amount in question happens to be the same as the amount of [Plaintiff’s] retroactive SSDI benefits, the funds [targeted] do not come from SSDI.“

Can a commercial airline pilot experiencing “psychotic episodes” fly a plane? You’ll find out if you read this case:
Miller v. American Airlines, __ F.3d __ (3rd Cir. January 25, 2011).

The case also highlights: (1) what should be in a benefit termination letter; (2) that new medical evidence is needed to justify benefit termination decisions; (3) that you should not deny benefits based on non-existent plan requirements; (4) the court’s remedy in benefit terminations may be retroactive reinstatement and not remand; and (5) Plans with “final and binding” independent medical reviews may not insulate from conflict of interest issues.

FACTS: Miller was a commercial airline pilot with “psychotic episodes” (not a great impairment for the occupation.) In 1999, he was awarded Long Term Disability (LTD) Benefits. The American Airlines plan had discretionary language.

In 2006, American terminated benefits stating “verification of such Disability [could] no longer be established” and because he had not made “substantial progress toward obtaining FAA medical certification.” Miller’s doctor later reconfirmed that Miller was disabled.

The Plan dictates that disputes will be referred to a “clinical authority” and findings of the “nature and extent of illness” shall be “final and binding.” So, American ordered a record review which concluded no disability existed because he was not treating and because Miller had not sought FAA certification. Miller sued for wrongful denial of LTD benefits.

TRIAL COURT: GRANTED SUMMARY JUDGMENT FOR PLAN.

THIRD CIRCUIT: REVERSES.

  1. Miller may not have outwardly manifested symptoms, but his psychiatric diagnosis remained constant and required regular treatment. Op. at 16
  2. A conflict of interest arises where an employer funds and evaluates claims. American funds the plan. Every dollar American saved by reducing disability payments decreased projected benefit obligations. The “final and binding” medical review provision was insufficient to totally eliminate any conflict of interest because American could seek further review of the medical review. Op. at 18.
  3. American’s initial grant of LTD benefits “does not operate as an estoppel such that they can never terminate benefits.” But reversing a disability decision, without new medical evidence, is evidence of abuse of discretion. Opinion at 21.
  4. Relying on non-existent plan requirements is arbitrary and capricious. Op. at 22. The denial letter and independent record review improperly relied in part on the fact that Miller had not pursued FAA certification. This was arbitrary and capricious. Op. at 21-2.
  5. Denial Letters and 29 C.F.R. 2560.503-1(a). Plan compliance with Section 503 and its regulations is evidence of arbitrary and capricious decision. Bar conclusions in denial letters, unsupported by rationale fail to provide “specific reasons” for denial, as required by the regulations. The denial letter here was deficient to two ways:
    1. The letter failed to provide specific reasons for denial. Op. at 28.
    2. The stated reason for denial: “inability to verify a disability” is a bare conclusion and not a “specific reason.” Op. at 28-9.
    3. The letter failed to advise Miller “precise information” on how to perfect the claim. Op. at 30.
  6. Failure to analyze all diagnoses is evidence the decision was arbitrary and capricious. Op. at 33
  7. The decision should assess claimant’s duties and the ability to complete them. Op. at 34-5. The District Court did not assess whether American and the independent medical record review adequately addressed Miller’s ability to fulfill his job requirements.
  8. The remedy is “retroactive reinstatement” and not remand. Op. at 38-40. In a situation where benefits are improperly denied at the outset, remand is appropriate. Op. at 39. But the proper remedy in situations where benefits are terminated, after initially granting them, retroactive reinstatement is the proper remedy. Op. at 40.

How important is it to produce an accurate, identical administrative record?

Pretty important. Producing an inconsistent administrative record may result in a court ordering discovery outside the administrative record.

Here’s the case of Pediatric Special Care, Inc. v. United Medical Resources and Darnden Restaurants, 2011 WL 133038 (E.D. Mich. January 14, 2011)(Producing different versions of the administrative record resulted in discovery of evidence outside of the record).

FACTS: Plaintiff (seeking ERISA benefits) sought discovery outside the administrative record because of alleged procedural due process violations and because Defendant produced “serial versions of the administrative record without being able to tell whether the complete administrative record had been assembled, or what the plan administrator considered in denying the claim.”

HELD: Order GRANTING Limited Discovery

RATIONALE/KEY QUOTE:

“[G]iven the different versions of the administrative record that were produced, it is impossible to determine what comprises a complete record on which the defendants relied when denying the plaintiff’s claim. The Court concludes that this claim justifies discovery beyond the administrative record.”

My apologies for such a direct question for the New Year, but a new case raises the point:

Must a beneficiary have his/her hands or feet at least partially “cut off” to qualify for Accidental Death and Dismemberment benefits? What does the term “dismemberment by severance” in an ERISA plan mean? Isn’t paralysis enough? No.

Here’s the case of Fier v. UNUM Life Insurance Co., __F.3d __ (PDF)(9th Cir. January 4, 2011)(paralysis resulting from “severance of spine” insufficient to qualify for AD&D benefit).

FACTS: Fier was a beneficiary under the employer’s Long Term Disability (LTD) and Accidental Death and Dismemberment (AD&D) benefits. An accident in 1992 severed his spinal cord and he became a quadriplegic; the company tailored a new position for him, paying him the same salary. His salary was reduced $20,000 in 1997. UNUM paid benefits from 1997-2004.

In 2004 UNUM informed Fier he had not been eligible for disability payments (since 1998) because he earned greater than 80% of his pre-disability earnings.

Fier sued, seeking benefits from 1993-1997 and a continuation of benefits. Fier contended, among other things: although his hands and feet remain physically attached to his body, he has lost them from a functional standpoint due to “severance” of his spinal cord.

TRIAL COURT: Applied de novo review and affirmed UNUM’s decision to end benefits.

NINTH CIRCUIT: AFFIRMS with the following rationale.

“‘Dismemberment by severance’ has to mean some actual, physical separation.” This is “unambiguous draftsmanship by an abundantly cautious lawyer.” The court relied on the holding involving nearly identical facts in Cunninghame v. Equitable Life Assurance Society of the United States, 652 F.2d 306, 307 (2nd. Cir. 1981).

So what can a court consider, in determining whether a conflict of interest affected the benefit denial?

 

Can a court consider evidence outside of the administrative record to assess the potential bias of the decision-maker in a case involving conflict of interest? YES

Here is Howley v. Mellon Financial Plan et al, __ F. 3d __ (3rd Cir. August 31, 2010)(pdf).

FACTS: Howley wanted ERISA plan benefits–which included severance benefits. When they were denied, he appealed and the program administrator affirmed the denial. So, he sued, alleging wrongful denial of benefits, and some wrongful discharge claims.

The plan had discretionary language, and there was a structural conflict of interest.

TRIAL COURT: Considered evidence outside the administrative record and found an abuse of discretion.

THIRD CIRCUIT COURT OF APPEALS: Affirmed abuse of discretion, but on other grounds, and remanded for further proceedings.

  1. Conflict of interest does not alter the standard of review. Conflict is merely one factor to be considered in evaluating whether the plan decision actually constituted an abuse of discretion. Op. at 16.
  2. Considering evidence outside the record:
  • Courts generally must base review on the materials that were before the administrator when the decision was made. Op. at 16-17
  • A court may consider evidence of potential bias that is not found in the administrative record. Op. at 17 (Adopting 9th Circuit case.)
  • The district court gave too much weight to extra-record evidence, and erred in resolving the disputed facts in favor of the claimant. Op. at 21.

Can you ask for a second Independent Medical Exam (IME)? Under what circumstances?

 

What happens when a claimant refuses to attend a second IME?

Here’s a short and sweet unpublished opinion you should know about: Burke v. Pitney Bowes INC Long Term Disability Plan, 2010 Westlaw 3258596 (9th Cir. August 18, 2010) (pdf).

FACTS: Cara Burke sought disability benefits. She attended one IME and, based on the IME, her benefits were denied. She appealed and submitted lots more information from her treating physician who disagreed with the IME opinion.

So, the plan asked for a second IME to allow the examining physician to consider and respond to the treating physician’s rebuttal of the initial IME opinions.

The plan language: (1) allowed for periodic IMEs, and (2) expressly provided that refusal to attend an IME could be a basis for terminating benefits.

NINTH CIRCUIT: Denial of benefits for refusing to attend second IME UPHELD

 

RATIONALE:

  1. Even accounting for the structural conflict of interest, termination of benefits was not an abuse of discretion.
  2. It was reasonable for the plan to request a second IME to allow the IME physician to consider whether his opinions had changed in light of contrary submissions from the treating physician.

So… what happens when a typo, or an erroneous sentence in an ERISA plan, creates a billion dollar liability for the plan?

Think about getting out of the bind arguing “scrivener’s error” or equitable reformation under Section 502(a)(3). Conkright v. Frommert, 130 S.Ct. 1640, 1644 (2010)(“People make mistakes. Even administrators of ERISA plans.”).

Attached is the newest case from the 7th Cir. applying it. Young v. Verizon’s Bell Atlantic Cash Balance Plan, __ F.3d __ (7th Cir. August 10, 2010)(The case of the $1.6 billion dollar typo–equitable reformation allowed under ERISA 502(a)(3)).

FACTS: A class of Bell Atlantic pension plan participants sued Verizon claiming Verizon miscalculated lump sum cash payments. This was a $1.67 billion error. There was a sentence in the plan that implied a calculation of the benefit should be multiplied twice. An in-house lawyer inadvertently forgot to delete a phrase from the end of a sentence, which caused the issue.

TRIAL COURT Ruling for BELL/VERIZON: “The phrase calling for a second multiplication was a drafting error….To enforce the erroneous plan provision now would result in an enormous windfall to the class participants.”

7th CIRCUIT: AFFIRMS, with the following rationale.

  1. “ERISA 502(a)(3) authorizes equitable reformation of a plan that is shown by clear and convincing evidence to contain a scrivener’s error that does not reflect participants’ reasonable expectations of benefits.” Op. at 18.
  2. “The drafting history left little doubt that the [language] was a mistake.” Op. at 21.
  3. The Court rejects the plan participants equitable defenses of “good faith and fair dealing,” “unclean hands,” and laches. Op. at 24-25.
  4. KEY CASES FROM OTHER JURISIDICTIONS–3rd and 9th Circuits:
    1. Int’l Union v. Mirata Erie N. Am., Inc., 980 F.2d 889, 907 (3rd Cir. 1992)(plan’s request for equitable reformation granted).
    2. Cinelli v. Sec. Pac Corp., 61 F.3d 1437, 1444-45 (9th Cir. 1995)(employee’s claim for equitable reformation denied).

What is the effect of a union collective bargaining agreement (CBA) on an ERISA claim? The claim might be arbitrated rather than venued in federal court, especially if the benefits are “predicated entirely” upon the terms of a Collective Bargaining Agreement (CBA).

Here’s the case of Audia et. al v. NEWCOR, Inc., F. Supp. 2nd, (E. D. Mich. July 23, 2010)(ERISA claim arbitrated based on collective bargaining unit venue provision). This case highlights that if you get in a dispute like this, make sure the ERISA plan documents are made a part of the record. It also shows what happens when plan documents are not made a part of the record.

FACTS: Twelve plaintiffs sought to enforce a benefit of lifetime medical insurance, contained in a CBA. The CBA required arbitration of disputes. The plaintiffs contended they should not have to arbitrate ERISA claims. The ERISA plan documents, if they existed, were NOT made a part of the record.

ISSUE: Whether an ERISA plan beneficiary can bring an independent claim for contractual benefits conferred under a CBA, where the CBA requires “arbitration of disputes” provision?

HOLDING: NO

RATIONALE:

  1. Burcicki v. Newcor, Inc., __ F. Supp. 2d (2010 WL 1131451 (E. D. Mich. March 23, 2010) applies here. In that case the Court held that two retirees were required to submit ERISA claims to arbitration by virtue of the CBA arbitration provision.
  2. ERISA beneficiaries seeking benefits from a CBA are third party beneficiaries and have no greater rights than does the promisee. A promisor may assert against any beneficiary any defense that he or she could assert against the promisee. Op. at 11.
  3. Defendant is entitled to assert any contract-based defense against the these plaintiffs, including that the claims should be arbitrated. Op. at 12.
  4. The ERISA benefits sought here are “predicated entirely” upon promises allegedly made in the CBA, and not the terms of any ERISA plan. No ERISA plan documents were part of the record. Op. at 14.