If an insurer recently denied your claim, do not ignore the appeal requirements stated in the denial letter or you may lose the right to pursue your benefits. The Employee Retirement Income Security Act of 1974, or ERISA, protects most employee benefits, such as life insurance benefits, long-term disability income insurance benefits, accidental death and dismemberment insurance benefits and other such benefits offered through employer-sponsored plans. ERISA does so by establishing certain internal claims handling procedures, often referred to as “administrative remedies.” These administrative remedies govern the claims handling process when an administrator determines a plan participant’s eligibility for benefits. Although each employer-sponsored plan has different requirements, most contain provisions that require a plan participant to exhaust at least one level of internal appeal before he or she can file a lawsuit. Typically, where a plan participant fails to do so, he or she will also lose the ability to further pursue wrongfully denied life insurance, long-term disability insurance, accidental death and dismemberment insurance benefits.

In this blog article, we briefly cover the basics of the exhaustion doctrine under ERISA. We discuss a few well-recognized exceptions to the requirement, where the internal procedures are inadequate or pursuing an appeal would be futile because it is “doomed to fail.” Although these exceptions apply in limited circumstances, it is important to remember that a plan participant/insured bears the difficult burden of establishing that he meets these requirements. Ultimately, the safest route is to do everything you can to comply with the appeal procedures, even if you think doing so would be futile.

A Brief Discussion of the Exhaustion Requirement
ERISA does not expressly mandate exhaustion of administrative remedies before filing suit. The requirement that a plan participant first exhaust his or her administrative remedies is a court-established doctrine. However, the requirement for exhaustion does find its origins in the text of ERISA, which contemplates a “full and fair review” of adverse benefit determinations made in the administration of an ERISA-governed plan for life, health, disability, accidental and other employer-sponsored benefits. If the plan documents expressly require exhaustion, the individual plan participant is required to complete the internal appeal as stated in the plan.

The courts strongly support the “sound policy” of requiring a plan participant to exhaust administrative remedies for several reasons. First, Congress specifically authorized the courts to establish a “common law” for issues under ERISA, and like the closely related Labor Management Relations Act, ERISA common law also requires exhaustion. Second, exhaustion is consistent with the Legislature’s aims and goals in its enactment of ERISA, which protects employees from abuse of their benefit or pension plans by establishing internal review requirements. Third, allowing levels of internal review gives the ERISA plan or claims fiduciary the ability to fully consider its determination of benefits. For example, if the claims administrator denies disability benefits based on missing or incomplete medical records, the appeal allows the participant an opportunity to point out the missing information and ensure that the information appears before the claims administrator. That way, if the administrator decides to uphold its denial of benefits, it is at least based on a full set of facts in support of the individual’s claim. Finally, the doctrine also helps to achieve sound judicial policy by promoting the efficient use of judicial resources. Requiring internal review ensures that, by the time the denial of benefits reaches the federal court, the primary dispute revolves around the adequacy of the decision, not whether a decision was made at all.

Exceptions to Exhaustion: When are Appeals Futile or Inadequate Internal Procedures under ERISA?
Most courts promote strict adherence to the exhaustion requirement. Accordingly, the courts recognize exceptions to it in only a few circumstances. As a general matter, there are two well-established situations where the exhaustion requirement does not apply: if procedures are inadequate or the appeal is futile. The plan participant bears the burden of proving these exceptions apply.

Inadequate Internal Procedures
The first exception, inadequacy, is aptly named because it simply refers to a situation where the plan’s internal claims handling procedures provide an inadequate remedy. For internal review procedures to be inadequate, the claimant must show that the procedures followed by the claims administrator failed to comply with the terms of ERISA or its implementing regulations. To do so, the plan participant must specifically allege how the plan’s terms or the administrator’s actual conduct violated the statute or regulations. Further, a minor error, alone, does not establish inadequacy. Typically, if the administrator can demonstrate substantial compliance, the court will find the claims procedures adequate.

Futility
In contrast, futility applies where a resort to the plan’s internal, administrative remedies would be futile, pointless and “doomed to fail.” In one relatively recent unpublished Ninth Circuit opinion, the Court reversed and remanded the District Court’s opinion granting summary judgment in favor of the insurer based on a failure to exhaust administrative remedies in connection with a denied long-term disability claim. See Carey v. United of Omaha Life Ins. Co., 633 Fed.Appx. 478 (9th Cir. 2016). In finding the appeal “futile” and excused from further exhaustion, the Ninth Circuit looked to the claimant’s conduct following the denial and the language of the communications between the insurer and the claimant. Following the denial, the claimant filed a complaint with the California Department of Insurance, which in turn requested that the insurer reevaluate its decision. Following this request, the insurer wrote to the claimant, stating that it had “reviewed all of the documentation” and was “unable to approve” his long-term disability claim.

Relying on ERISA principles that the terms in an ERISA plan should be interpreted in an ordinary and popular sense, the Court determined that the insurer’s imprecise communications indicated to the claimant that pursuit of further review would have been futile as follows:

Because of the imprecision in United’s communications, however, a person in Carey’s position would have thought that United had reviewed the substance of his case and decided anew that he was not entitled to benefits. The plain language of the communications indicated to Carey that pursuing a further request for review—thinking that one had already occurred—would have been futile. C.f. Vaught, 546 F.3d at 628 (explaining this court’s “principle that terms in an ERISA plan should be interpreted in an ordinary and popular sense as would a [person] of average intelligence and experience” (internal quotation marks omitted)); Booton v. Lockheed Med. Benefit Plan, 110 F.3d 1461, 1463 (9th Cir.1997) (when communicating to claimants that benefits are denied, “the reason for the denial must be stated in reasonably clear language”). Id., at 479.

The Court found futility expressed in the communication quoted above, even though the same communication also reiterated the appeal procedures to the claimant.

In most cases, it will not be easy to prove an exception to the exhaustion requirement. Accordingly, the safest way to protect your benefits is to ensure that you understand and comply with the strict deadlines and requirements for an internal appeal, even if you think doing so would be futile or the procedures are inadequate.