In this several-part blog series titled The Basics of an ERISA Life, Health and Disability Insurance Claim, we discuss the basics of an ERISA life, health, accidental death and dismemberment and disability claim, from navigating a claim to handling a claim denial and through preparing a case for litigation.  In Part Twelve of this series, we discuss the standard of review.  The standard of review can greatly affect the outcome of any litigation for insurance benefits.

As we previously noted in this series, before suing an insurer over denial of benefits under a policy governed by ERISA, an insured must usually file an administrative appeal.  In theory, this gives the insurer and insured a chance to “have a meaningful dialogue” regarding the disability, life, health, or accidental death and dismemberment claim over the benefits and gives the insurer another opportunity to make the correct decision.  In reality, more often than not, insurers just use this time to create as compelling a case as possible to deny the claim for benefits and to set themselves up to win in litigation.  If the claim is denied and the insured has pursued all mandatory appeals, the insured can sue the insurer.  In the resulting ERISA litigation, the federal court will examine the insurer’s decision, records and reasoning to determine whether to affirm the denial.

The standard of review is a measure of how much discretion the insurer has to deny a claim.  This applies during any litigation arising from the denial of an ERISA claim.  If the claim for benefits is approved, then the standard of review is irrelevant.

Generally speaking, there are two standards of review: “abuse of discretion/arbitrary and capricious” and “de novo.”  The terms “abuse of discretion” and “arbitrary and capricious” tend to be used interchangeably.  Under the abuse-of-discretion standard, the court should overturn a ruling when it is “without reason, unsupported by substantial evidence or erroneous as a matter of law.”  Miller v. Am. Airlines, Inc., 632 F.3d 837, 845 (3d Cir. 2011).  Under the de novo standard of review, “the burden of proof is placed on the claimant” to establish entitlement to plan benefits.  Muniz v. Amec Const. Mgmt., Inc., 623 F.3d 1290, 1294 (9th Cir. 2010).  “When conducting a de novo review of the record, the court does not give deference to the claim administrator’s decision, but rather determines in the first instance if the claimant has adequately established that he or she [qualified for benefits] under the terms of the plan.”  Id. at 1295-96.  The trial court performs an “independent and thorough inspection” of the plan administrator’s decision in order to determine if the plan administrator correctly or incorrectly denied benefits.  Silver v. Executive Car Leasing Long–Term Disability Plan, 466 F.3d 727, 733 (9th Cir. 2006).  De novo review permits the trial court to “evaluate the persuasiveness of conflicting testimony and decide which is more likely true.”  Kearney v. Standard Ins. Co., 175 F.3d 1084, 1095 (9th Cir.1999).

The easiest way to think of the standard of review is to think of a meter measuring how much an insured has convinced the court that he or she is entitled to benefits.  Under de novo review, the insured need only establish 50.01% on the meter.  Under the abuse-of-discretion standard, that number is much higher.  With that standard, it helps to think of that number perhaps being 60% or even higher.  An ERISA claimant/insured wants the de novo review standard to apply.  Under the abuse-of-discretion standard, an insurer may be able to deny claims that, to a layman, are clearly meritorious.  For example, a court may uphold an insurer’s decision where the insured’s treating physician stated that the claimant is disabled, but the insurer hired a doctor to conduct a “paper review” of the insured’s file without examining the insured and then denying the claim based on the resulting report.  Because the hired paper reviewing doctor concluded that the person did not have a serious medical condition or did not have sufficiently disabling restrictions and limitations, the insurer’s resulting decision was not “without reason, unsupported by substantial evidence or erroneous as a matter of law.”  Miller, 632 F.3d at 845.  In short, the standard of review is critically important in most cases and may be outcome determinative.

The standard of review exists because insurance policies/ERISA plans have language that gives discretion to the claims administrator or employer in determining coverage and benefits issues.  The standard of review is based on such a grant of discretion clause.  If there is no such clause, then the default standard of review is de novo.  Most ERISA plans in the United States include a discretionary clause if the applicable law permits the clause’s inclusion.  Insurers and employers like these clauses because it makes their determinations more likely to be affirmed by the courts.

We all know that insurance companies generally seek profit over making claims decisions that result in paying claims and thus readily deny many valid claims merely to avoid paying benefits under the plan.  Because of this, many states have banned clauses that grant discretion to insurance companies.  These states want the courts to review the evidence and decide whether a person is entitled to the benefits without a presumption in favor of the insurer’s or employer’s claim decision.  For example, such clauses are banned in California.  California Insurance Code Section 10110.6 invalidates discretionary clauses for all life insurance and disability insurance plans.  As a result, for a disability plan that insures an individual residing in California, an insurer’s decision will almost always be subjected to de novo review.  Furthermore, some courts in California have interpreted Section 10110.6’s language as applying to medical insurance plans as well.  See Ticconi v. Blue Shield of California Life & Health Ins. Co., 160 Cal.App.4th 528, 540, n.7 (2008); Mahlon D. v. Cigna Health and Life Ins. Co., 291 F.Supp.3d 1029, 1031-32 (N.D. Cal. 2018).

Even though ERISA is federal law, many of these state laws still apply to contracts governed by ERISA.  In many circumstances, ERISA preempts state law.  However, laws such as California’s Section 10110.6 are not preempted by ERISA because of ERISA’s “saving clause that saves from preemption ‘any law of any State which regulates insurance, banking, or securities.’” See, e.g., Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, Plan Number 625, 856 F.3d 686, 692-695 (9th Cir. 2017).  Furthermore, this applies to all ERISA plans and insurance policies.  See id. at 695.  As such, in California, there is little dispute that, for a disability, life insurance or accidental death claim, the standard of review will be de novo.  In many other states, there are similar laws that alter the standard of review for many types of policies.

Another temperance on the abuse-of-discretion standard lies in the fact that courts have ruled that discretionary clauses are disfavored as a matter of public policy.  This means that an insurer must be careful about how the clause is worded.  If the court concludes that the clause is less than clear or has any a defect that the court can locate, the clause will be deemed invalid, and the standard of review will be de novo.

Ultimately, the standard of review is a critical aspect of any ERISA lawsuit for pension or insurance benefits.  Even when filing a mandatory administrative appeal, a claimant, or his or her attorneys, must always keep in mind how the standard of review will influence the court’s decision on a claimant’s entitlement to benefits.  Such considerations are paramount in pursuing a claim.