When the Clock is Ticking: The Interplay of the Contractual Limitations Period and the Statute of Limitations in a Disability Insurance Case

The Employee Retirement Income Security Act of 1974, otherwise known as ERISA, governs most employer-sponsored benefit plans, including short and long-term disability benefits, life benefits, accidental death and dismemberment benefits and others.  ERISA was enacted to protect employer-sponsored benefits provided to employees.  As such, ERISA requires that the plan administrator, typically the insurer or employer, adhere to strict standards and deadlines.  However, while ERISA does set strict internal deadlines for the appeals process, it does not specify a time limit to bring a lawsuit for wrongfully denied benefits.  In this article, we discuss the statute of limitations and the contractual limitations periods in ERISA benefits cases and a relatively recent and plaintiff-friendly case decided by District Court judge Michael Fitzgerald out of the Central District of California.

What is a Statute of Limitations?

A statute of limitations refers to the amount of time a party has to initiate a lawsuit based on a certain harm or injury.  The statute of limitations that governs a claim varies depending on the type of relief a party seeks, as well as where the relief is sought.  For example, California Code of Civil Procedure Section 339 sets the relevant statute of limitations for filing an insurance bad faith action at two years.  Other states provide for a different statute of limitations.

What is the Statute of Limitations for an ERISA Benefits Claim under Section 502?

A participant in an employer-sponsored benefit plan covered by ERISA may bring a civil action under section 502(a)(1)(B) to recover benefits due under the terms of the plan.  While courts have generally required that a participant exhaust the plan’s administrative remedies before filing a lawsuit to recover benefits, ERISA does not specify a statute of limitations for filing suit under section 502(a)(1)(B).  Because ERISA does not establish a time limit for such claims, the courts typically fill the gap by applying the “most analogous” state statute of limitations.  In the Ninth Circuit, the “most analogous” statute of limitations is the state’s contract limitations period.  In California, that is the four-year statute of limitations for written contracts established by California Code of Civil Procedure Section 337.

Heimeshoff v. Hartford Life & Accident Insurance Co.

In Heimeshoff v. Hartford Life & Accident Insurance Co., 134 S.Ct. 604, 611(2013), the United States Supreme Court found that a contractual statute of limitations period will be enforceable so long as it is (1) reasonable or not “unreasonably short” and (2) it is not contrary to controlling state statute.  To determine whether a given plan’s statute of limitations is reasonable depends on the specific factual circumstances of the action.  In Heimeshoff, the Court found the time limit reasonable because it gave the participant a year to file suit from the date the insurer denied the claim on appeal.  However, because ERISA requires that a claimant exhaust her administrative remedies before she files a lawsuit, in some cases, the time it takes to complete that internal review process may prevent a participant from bringing a Section 502(a)(1)(B) action within the contractual limitations period.  But, in that event, a court may consider an equitable doctrine that would otherwise allow the participant to proceed.

As to the second question, regarding a controlling statute to the contrary, a United States District Court for the Central District of California recently discussed this issue and the application of California statutes in Gray v. United of Omaha Life Ins. Co., 251 F.Supp.3d 1317 (C.D. Cal. 2017).  In an opinion very favorable to ERISA disability plaintiffs, the court discussed the proper analysis of the statute of limitations and the contractual limitations period in detail.  In determining whether an ERISA claim is timely, one must first look to whether it violates the controlling statute of limitations and second, whether it violates the contractual limitations period.

In its analysis of the applicable statute of limitations, the court found the four-year statute of limitations controlled and begins to accrue at the date of denial on appeal.  In other words, a plaintiff would have four years from the date of the denial on appeal to file a lawsuit under ERISA.

In its analysis of the contractual limitations period applicable, the court first looked to Hemeshoff, finding that it must give effect to the plan’s contractual limitation provision unless unreasonable or prevented by a controlling statute.  The Group Policy at issue contained the following contractual limitations provision: “No legal action can be brought until at least 60 days after [United has] been given written proof of loss. No legal action can be brought more than two years after the date written proof of loss is required.”  Both parties agreed that California Insurance Code section 10350.11 must be read into the contract to extend the limitations term to three years after the date written proof of loss is required.  Next, the court compared the Group Policy’s applicable limitations period to provisions of the California Insurance Code to determine which was more favorable (the more favorable provision would control).  The applicable Group Policy terms set the time to file suit as, at most, four years and 180 days from the first date of disability.  In comparison, the California Insurance Code section 10350.7 set the time as “90 days after the termination of the period for which the insurer is liable.”  Siding with the majority of jurisdictions that had interpreted the model language after which section 10350.7 was taken, it interpreted “the insurer is liable” to include an entire, ongoing period of disability, because the court found the latter provision more favorable, and thus read it into the Group Policy.

In sum, the application of the contractual limitations period and the statute of limitations period can be complicated and understanding the interplay of these important limitations periods is critical when an insurer challenges the timing of the filing of an action against it.

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