Although we recently explained that policies offered, issued, delivered, or renewed on or after January 1, 2012 are afforded de novo review as a result of California Insurance Code section 10110.6 (see The Death of the Abuse of Discretion Standard of Review in ERISA Disability Insurance Cases in California), a recent ERISA case helps to remind us that older ERISA plans, which vest discretion in plan administrators and claim administrators, remain subject to the more lenient abuse of discretion standard of review. Accordingly, it remains critical to understand how courts review a plan administrator’s decision to deny benefits under this standard of review.
In Yancy v. United of Omaha Life Insurance Company, 2015 U.S. Dist. LEXIS 172233 (C.D. Cal. December 18, 2015), a plaintiff brought a lawsuit against United of Omaha Life Insurance Company (“Omaha”) alleging wrongful denial of long-term disability insurance benefits. The plaintiff suffered from a number of physical and cognitive problems, including fibromyalgia, major depression, and possible systematic lupus erythematosus. She was then placed on medical leave and treated by a number of specialists who prescribed her various medications for her symptoms and consistently confirmed that she was suffering from these conditions and who confirmed that the plaintiff was disabled and unable to return to work.
The plaintiff filed a claim for long term disability insurance benefits but Omaha denied the claim based on the opinions of two nurses who reviewed the claim and stated that the claim had no supporting documents evidencing any restrictions or limitations.
The plaintiff then supplemented her appeal with updated medical records supporting her condition. Omaha conducted a peer review for the appeal by a Dr. David Knapp. Dr. Knapp selected a handful of terms found in the medical records that might suggest that the plaintiff was not suffering from a disability and completely ignored the consistent findings of the plaintiff’s numerous other doctors. Dr. Knapp also questioned the accuracy of the methods for diagnosis of one of the plaintiff’s doctors, Dr. Castellon. Dr. Knapp concluded that he had “no objective evidence of any neurocognitive or neurobehavioral restriction or limitation for this claimant.”
The plaintiff requested that Dr. Castellon have an opportunity to provide a rebuttal opinion to justify his methods prior to Omaha’s final decision. Instead, Omaha failed to give Dr. Castellon the opportunity to do so, denied the appeal based on Dr. Knapp’s opinion, completely ignored the consistent opinions and medical records of plaintiff’s doctors, and cherry-picked isolated statements made by plaintiff’s doctors to construe them as supporting Omaha’s denial.
The facts in Yancy make clear that Omaha denied the plaintiff’s benefits despite clear and credible evidence of her disability. However, the court’s application of the abuse of discretion standard of review is worth recalling.
The court in Yancy explained that, while there are circumstances under which a plan administrator’s decision to deny benefits is clearly an abuse of discretion, the court generally determines whether the decision was an abuse of discretion by weighing a number of factors to find whether the decision was reasonable in light of all surrounding circumstances.
The court considers several case-specific factors in determining whether the decision to deny benefits was reasonable, such as the plaintiff’s evidence of his or her disability, the circumstances surrounding the plaintiff’s leave, the plan administrator’s supporting evidence, and the plan administrator’s conduct. In fact, the plan administrator’s conduct is particularly important in the court’s review of the decision to deny benefits. Indeed, if the plan administrator appeared to have acted upon some form of conflict of interest or to have committed a procedural error, the plan administrator’s credibility becomes an issue, and the court will then view the decision with “increased skepticism.”
As noted above, certain circumstances surrounding the decision to deny benefits may so clearly demonstrate an abuse of discretion that the court need not weigh the above factors. The court in Yancy named three: (1) when the plan administrator renders the decision without any explanation; (2) when the plan administrator construes the terms of the plan in a way that conflicts with the plain language of the plan; and (3) when the plan administrator fails to develop facts it found necessary in making its decision.
The court held that Omaha’s decision was an abuse of discretion because Omaha’s construction of the plan’s provisions were conflicting because Omaha effectively construed the plan as requiring objective evidence to prove the plaintiff’s claim, despite the plain language of the plan allowing for the use of subjective evidence. The court further held that Omaha’s decision was an abuse of discretion because, not only did Omaha fail to develop facts it deemed necessary in making its decision, but it relied on clearly erroneous findings of fact.
The court in Yancy also found that it should view Omaha’s denial with “increased skepticism” because (1) Omaha committed a procedural error by failing to consider Dr. Castellon’s rebuttal opinion, and (2) a structural conflict of interest existed as Omaha both funded the benefits for the policy and determined eligibility for policyholders’ claims.
Interestingly, the court also considered Omaha’s choice of hiring Dr. Knapp to review the appeal as probative evidence of Omaha’s conflict of interest. Most notably, the court actually looked outside of the administrative record at a letter written by Dr. Knapp, indicating Dr. Knapp’s biased opinion that disability benefits are actually harmful to people with fibromyalgia. The court justified looking outside the administrative record on the grounds that, “when a court must decide how much weigh to give a conflict of interest under the abuse of discretion standard . . . the court may consider evidence outside the record . . . to decide the nature, extent, and effect on the decision-making process of any conflict of interest.”
Thus the court held that, even if Omaha did not construe conflicting provisions or rely on an erroneous factual basis for its determination, in viewing the decision with increased skepticism, Omaha’s decision was not reasonable and, therefore, an abuse of discretion in light of all the evidence before the court.
In sum, the abuse of discretion standard of review is a question of reasonableness. As we move forward, the day may come when the abuse of discretion standard will become obsolete in ERISA cases filed in California Federal Courts. However, this recent case reminds us that, until that day comes, it is necessary that we maintain our understanding of the abuse of discretion standard for those cases to which the standard still applies.