ERISA - Standard of Review Archives - Page 3 of 4

Sometimes an administrator so unashamedly abuses its discretion in handling an insurance claim that its actions constitute a textbook example of “what not to do” for other administrators and the ensuing decision provides a clear illustration of how courts apply an abuse of discretion standard of review under the Employee Retirement Income Security Act (“ERISA”). Indeed, a recent case clarified that plan administrators and third-party claims administrators alike are held to comparable standards when issuing claims decisions. In Pacific Shores Hospital v. United Behavioral Health, 2014 WL 4086784; 2014 U.S. App. LEXIS 16062 (9th Cir. Cal. Aug. 20, 2014) (“Pacific Shores”) the Ninth Circuit Court of Appeal reversed the district court, finding the third-party administrator acted improperly by denying the insured’s claim based on clear factual errors. Pacific Shores provides a clear example of how courts review a decision for an abuse of discretion, and shows that even third-party administrators, who purportedly have no conflict of interest with the insured, are still held to have the same duties in handling claims and must follow appropriate procedures.

Pacific Shores involved a Wells Fargo & Company (“Wells Fargo”) employee, dubbed “Jane Jones” by the court, covered under the employer’s health plan (“Plan”), governed by ERISA and administered by United Behavioral Health (“UBH”), a third-party claims administrator. Jones was admitted to the Pacific Shores Hospital (“PSH”) for inpatient treatment for severe anorexia nervosa and major depression with suicide attempts. During her inpatient stay, Jones submitted a claim to UBH for the costs of treatment, but UBH refused to pay for more than three weeks of treatment. PSH continued to treat Jones following UBH’s refusal, and subsequently Jones assigned her rights to payment under the Plan to PSH. PSH sued UBH and the Plan seeking payment for the additional days of inpatient treatment. The district court ruled in favor of UBH, finding that Jones’ administrative record provided a reasonable basis for UBH’s denial decision.

On appeal, PSH conceded the Plan granted discretion to the administrator, but advanced three arguments for the court to adopt a less deferential review of UBH’s decision. First PSH argued UBH’s claims administration contained procedural irregularities such that the denial should be reviewed de novo. Based on its review of the case, the court agreed, stating it was “painfully apparent” that UBH did not follow appropriate procedures in reaching its denial. For instance, although UBH maintained Jones’ case required medical evaluation due to its “‘medical and psychiatric complexity,’” UBH’s decision was based almost entirely on telephone conversations and voicemail messages. Indeed, Jones’ claim file was remarkably devoid of any hospital records or independent examination results. Moreover, UBH’s physician evaluations contained “obvious factual errors could easily have been corrected” if UHB consulted the PSH records or its own administrative record.

Second, PSH argued the court should consider materials outside Jones’ administrative record to review UBH’s denial decision. The district court declined to consider documents beyond the administrative record, as is typical in cases where a court is reviewing for abuse of discretion. However, the Court of Appeal explained when the administrator’s decision contains procedural irregularities, courts may consider extrinsic evidence to review the impacts of the irregularity. In the instant case, the administrator issued its decision based solely on telephone conversations and conflicting information despite the “medical and psychiatric complexity” involved in Jones’ case. The court determined that a review of the medical files would be helpful in establishing the accuracy of medical facts and Jones’ condition, and therefore it was appropriate to consider extrinsic evidence.

Next, PSH argued that even though UBH was third-party administrator, it was operating under a conflict of interest based on a desire for a continued relationship with Wells Fargo, and the court should consider these factors deciding whether UBH abused its discretion. The court declined to rule on this matter, stating that based on the record UBH reviewed before issuing its decision, UBH improperly denied Jones’ benefits. Indeed, even absent this analysis, the court found that there was sufficient information to conclude UBH acted improperly.

The court then explained the abuse of discretion standard entails a review of all the surrounding circumstances for “‘any reasonable basis’” to support an administrator’s decision. An administrator abuses its discretion if the administrator rendered its decision without any explanation, construed plan provisions in a way that conflicts with the plain language of the plan, fails to develop necessary facts for its determination or relies on clearly erroneous facts. In Jones’ case, the Plan documents represented an insured was eligible for coverage if any one of six state criteria was met, including having a “serious medical condition” requiring “24-hour management.” UBH authorized coverage for three weeks of inpatient treatment for Jones after finding this criteria applied. The Plan further also explains a plan member is eligible for continued coverage based on ten listed criteria involving a continuing condition and active participation in treatment. UBH, based on its physician evaluations, determined that Jones failed three of the ten criteria, as she did not meet the required level of care, she was not in danger of deterioration if transitioned into a lower level of care, and she was effectively recovering, as determined by UBH’s physician evaluations. The court first noted that in cases where residential care was required, the requirement necessarily satisfied the ten criteria regarding level of care and participation in treatment. The physician evaluations contained critical factual errors which downplayed Jones’ condition. Ultimately, the court held UBH breached its fiduciary duty to discharge its duties with “‘care, skill, prudence, and diligence” and solely in the interest of the Jones by employing and relying on three physician evaluators who made critical factual errors supporting UBH’s denial decision, and its denial was improper under the plan.

Pacific Shores clearly shows third-party administrators are held to the same fiduciary duties as first party plan administrators to act in the insured’s interests when administering claims. The case also provides support for allowing extrinsic documents in ERISA cases where the administrative record is inadequate. Although Pacific Shores leaves open the question of whether a third-party administrator may be acting under a conflict of interest with the insureds, for now, third party-administrators are not spared from federal ERISA laws applicable to plan administrators.

When reviewing a claim for disability insurance, insurers and other claim administrators often rely on the opinions of paid physicians to support their improper denial decisions. For example, a disability insurance company will hire a doctor to conduct a “paper review” – that is, reviewing an insured’s medical records, without actually examining the insured – and then offer an opinion on the insured’s ability to return to work. If the “paper reviewer” opines that the insured is capable of returning to work, the insurance company will then rely on that opinion to deny the claim for benefits; even if the insured’s own treating physicians repeatedly state that the insured is disabled. However, in Oldoerp v. Wells Fargo & Co. Long Term Disability Plan, 2014 U.S. Dist. LEXIS 9847, 2014 WL 294641 (N.D. Cal. Jan. 27, 2014), the court held that with a psychological disability, a treating mental health professional’s observations are “more persuasive” than a paper reviewer’s opinion. This opinon is beneficial for policyholder/insureds, espeically in ERISA cases, because insurers will have a harder time using the opinions of paid, so-called “experts” who do not examine the insured to support their improper claim decisions.

In 2007, Kerilei Oldoerp was forced to stop working after experiencing a host of symptoms, including pain, fatigue and depression. Eventually, Oldoerp was diagnosed with a variety of conditions, including depression, chronic fatigue syndrome, fibromyalgia, generalized anxiety, panic disorder and Bartonella. Oldoerp made a claim for short-term disability (“STD”) benefits, and then long-term disability (“LTD”) benefits. MetLife, the claim administrator, approved her STD claim, and also paid her LTD benefits for one month before denying the claim, and forcing Oldoerp to bring an ERISA lawsuit to recover the disability benefits to which she was rightfully entitled.

In Oldoerp, the District Court originally upheld MetLife’s claim decision, ruling that its decision to deny benefits was not an abuse of discretion. However, on appeal, the Ninth Circuit, following CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011), overturned that ruling because the discretionary language was contained in a summary plan description, but not the acutal plan. On remand, applying the de novo standard of review, the district court ruled in Oldoerp’s favor, finding that “Oldoerp, more likely than not, was disabled under the plan’s[IC1] terms beginning in August 2007,” and that her disability persisted after February 13, 2008, the date MetLife determined she was capable of returning to work.

In reaching this ruling, the District Court reviewed the medical evidence in the Administrative Record, as well as Oldoerp’s Social Security Disability Insurance file, after finding that it was “necessary . . . for an adequate de novo review.” First, noting that MetLife had previously approved Oldoerp’s LTD claim, in order to find that Oldoerp was not longer disabled, “one would expect the [evidence] to show an improvement, not [simply] a lack of degeneration.” However, the record did not reveal that Oldoerp’s condition improved. Rather, the records of Dr. Becky Simonelic, a psychologist who “treated Oldoerp longer and more often than any other medical professional in the record,” showed that Oldoerp’s condition had actually “deteriorated without significant improvement.”

In defending the denial decision, MetLife relied on psychologist Marcus J. Goldman, its paid physician who did not examine Oldoerp, but, after conducting a “paper review” opined that she failed to demonstrate psychiatric functional limitations after November 2007. The Court found Dr. Goldman’s conclusions to be “minimally persuasive.” First, while Dr. Goldman criticized the “subjective evidence” used to support Oldoerp’s disablity, the Court noted that an insured is “entitled to rely on credible subjective evidence in support of her claim,” especially when “the record lacks persuasive objective evidence to rebut the credible evidence” supporting the disability. In addition, the court noted that while Dr. Simonelic “consistently observed Oldoerp throughout the pendency of her claim, Goldman never examined Oldoerp,” and explained that “[w]hile an ERISA plan administrator need not provide in-person medical evaluations of its claimants, Simonelic’s in-person observations are more persuasive than Goldman’s paper review.” The Court also noted that “in-person examinations can prove more conducive to an accurate assessment of a claimant’s condition.”

Based on Dr. Simonelic’s opinions, and the other medical evidence in the record, the Court ruled that Oldoerp was entitled to a reinstatement of her LTD benefits. This opinion is very good for insureds. In addition, to holding that the opinions of a doctor who only conducted a “paper review” was only minimally persuasive in the face of a contradictory opinion by a treating physician, the Court also ruled that a Social Secuity Disability Insurance file was necessary for a full de novo review (following Mongeluzo v. Baxter Travenol Long Term Disability Ben.[IC2] Plan, 46 F.3d 938, 943 (9th Cir. 1995)) and that a disability claim can be supported by subjective evidence, especially where there is no contrary objective evidence.

On November 27, 2012, following a trial before Judge Cormac J. Carney of the United States Federal District Court for the Central District of California, Robert J. McKennon and Scott E. Calvert of the McKennon Law Group secured a victory for their client in a lawsuit against Sun Life and Health Insurance Company. Representing the claimant, Mr. Evans, the McKennon Law Group convinced the District Court that Sun Life abused its discretion in denying Mr. Evans’ claim for long-term disability benefits and that Mr. Evans is entitled to receive his disability benefits that Sun Life denied him.

Mr. Evans was an attorney who unfortunately suffered a mental breakdown that left him unable to return to work. While his claim for short-term disability benefits was approved and paid by Sun Life, the company improperly denied his claim for long-term disability (“LTD”) benefits. When Sun Life refused to overturn its claim decision on appeal, Mr. Evans hired the McKennon Law Group to file a lawsuit against Sun Life, alleging that the decision to deny his claim for LTD benefits violated the Employee Retirement Income Security Act of 1974, also known as ERISA. Mr. Evans filed a Complaint in September 2011.

During the litigation, the parties could not agree as to the proper scope of discovery in an ERISA matter. After the parties presented the dispute the Court, Mr. Evans was permitted to conduct discovery regarding Sun Life’s conflict of interest through written discovery and deposition testimony.

Following the trial, Judge Carney issued a Memorandum of Decision in Mr. Evans’ favor. While explaining that the Plan’s language mandated that Sun Life’s decision should be reviewed under the more lenient “abuse of discretion” standard of review, the Court found that Mr. Evans presented:

evidence that Sun Life failed to credit Mr. Evans’ reliable evidence, failed to adequately investigate the claim, and failed to ask Mr. Evans for necessary evidence. As a result, the Court will give considerable weight to Sun Life’s conflict of interest in determining whether it abused its discretion in denying Mr. Evans’ claim.

The Court then explained that despite being presented with medical evidence supporting Mr. Evans’ claim for disability benefits, Sun Life abused its discretion in denying his claim:

In addition to the conflict of interest, the other factors, “the quality and quantity of the medical evidence, whether the plan administrator subjected the claimant to an in-person medical evaluation or relied instead on a paper review of the claimant’s existing medical records, whether the administrator provided its independent experts with all of the relevant evidence, and whether the administrator considered a contrary SSA disability determination, if any,” Montour, 588 F.3d at 630, weigh in favor of a finding that Sun Life abused its discretion. Specifically, its decisions that Mr. Evans was not disabled until December 13, 2007 and that Mr. Evans was not disabled throughout the elimination period were illogical, implausible, and without support in inferences that could reasonably be drawn from facts in the record because: (1) every doctor who personally examined Mr. Evans concluded that he was disabled and unable to return to his regular work; (2) Sun Life did not subject Mr. Evans to an in-person medical evaluation; (3) Sun Life relied almost exclusively on the deeply flawed assessment by Dr. Himber; (4) and Sun Life failed to engage in a “meaningful dialogue” with Mr. Evans.

In conclusion, the Court ruled that the “evidence in the record overwhelming shows that Mr. Evans was totally disabled prior the date of his termination and throughout the elimination period” and ordered Sun Life “to pay long-term disability benefits to Mr. Evans in accordance with the Policy.”

Robert J. McKennon and Scott E. Calvert litigated the case on behalf of Mr. Evans.

This article continues our series of articles answering basic questions about insurance law and the Employee Retirement Income Security Act of 1974 (commonly referred to as “ERISA”). This one addresses: In a lawsuit governed by ERISA, what actions taken by the claims administrator (usually an insurance company such as Blue Cross/Blue Shield or CIGNA) will reduce the level of discretion the court gives the insurance company’s decision when reviewing the decision for an abuse of discretion?

Under ERISA, the court does not necessarily review the claims decision by simply attempting to determine whether the insurance company made the “correct” decision. Instead, the court first looks to see whether the plan documents unambiguously confer discretion for determining eligibility on the claim administrator. If discretionary language is present, the abuse of discretion standard of review applies, and the court is required to give some level of deference to the claim administrator’s decision. However, even if such discretionary language is present, the discretion given the claim administrator’s decision is not absolute. Specifically, courts have ruled that the following acts will reduce the level of discretion give to the claims administrator’s decision:

Rendering a decision without explanation, construing a plan provision in a way that conflicts with the plain language of the plan or relying on clearly erroneous findings of fact.
“Hiding the ball” by failing to advise claimants of documents needed to obtain approval of claim and an explanation of why such material or information is necessary, and failing to submit forms to claimant or his doctors that would have elicited the information needed.
Overstatement of and excessive reliance upon claimant’s activities in the surveillance videos and conducting a paper review rather than an “in-person medical evaluation.”
Encouraging participant to file for Social Security Disability Insurance and, when benefits are awarded by Social Security Administration, failing to deal with and distinguish the contrary disability decision.
Failing to obtain a physician’s recommendation and relying on medical reports that are not credible.
“Tainting” medical file reviewer in the medical review process by giving the reviewer inaccurate negative information regarding the claimant.
Failing to consult with a health care professional who has appropriate training and experience in the applicable field of medicine.
Emphasizing a report that favored a denial of benefits while deemphasizing other reports suggesting a contrary conclusion, and failing to provide its independent experts with all of the relevant evidence.
Failing to provide all bases for its denial and suggesting alternate reasons for denial after the fact, thereby precluding the claimant from responding to that rationale for denial at the administrative level.
Adding new terms to the Plan, particularly when those terms are both imprecise and impose a higher evidentiary burden on a claimant, such as requiring that disability be proved by “compelling objective” evidence.

These are just a select few of the acts that courts have ruled require that the insurer’s decision not be afforded full discretion. Numerous other actions will also cause a court to review a claim decision with something less than full discretion. For additional information on this and other insurance matters you can visit the FAQ section of our website: www.mslawllp.com.

If you need to consult with an attorney about a possible ERISA or insurance bad faith matter, please contact our office.

In a major victory for consumers, Governor Jerry Brown signed a bill that makes discretionary clauses – typically contained in ERISA-governed life, health and disability insurance policies/ERISA plans void and unenforceable in new or renewed policies. SB 621 was authored by Senate Insurance Committee Chair Ron Calderon (D-Montebello) and sponsored by Insurance Commissioner Dave Jones, and was similar to AB 1686 vetoed by Governor Schwarzenengger in 2010. Discretionary clauses are provisions typically found in group life, health and disability plans that give the administrator/insurer the sole discretion to interpret the policy and to decide if a plan participant or beneficiary is entitled to plan benefits. In ERISA cases, federal courts have interpreted these clauses to give administrators/insurers a higher standard of review when courts review their decisions. This meant that the federal courts were required to give greater deference to decisions denying plan benefits under life, health or disability coverages, rather than weighing all the evidence under a “de novo” standard of review and making their own determination as to whether the insured was entitled to benefits under the policy or employee welfare benefit plan. Insurance companies and plan administrators often rely on these clauses when they deny claims, knowing that the insured must demonstrate that the insurance company acted arbitrarily/abused their discretion – typically a burden – in order to prevail in a lawsuit against them. With the passage of this new law, insurance companies and plan administrators will no longer be able to rely on discretionary clauses in an attempt to insulate their decisions from critical judicial scrutiny. Accordingly, in the future, judges will no longer be required to defer to the decision of the insurance company and plan administrator, lessening the burden placed on ERISA plan participants and beneficiaries in seeking to overturn insurance claim denials. In voicing his support for the bill, Commissioner Jones explained:

“Discretionary clauses have been increasingly relied upon by insurers to reject legitimate claims for disability insurance when a consumer becomes disabled – insurers know that many consumers will give up their claim and that those who challenge the claim denial face a very high legal burden to overcome the denial since the discretionary clause vests sole discretion in the insurer to decide if the consumer is disabled. SB 621 levels the playing field and gives consumers an even chance to prove that they are entitled to disability and other insurance, by eliminating the ‘discretionary clauses’ that insurers have been putting into their insurance policies.”

SB 621 goes into effect on January 1, 2012

Today Governor Schwarzenegger vetoed AB 1868 that would have banned discretionary clauses in group insurance policies. This is a disappointment to consumer groups but not to insurers who rely on them. Currently, the Department of Insurance bans them in group policies anyway. Here are the Governor’s comments on why it was vetoed:

To the Members of the California State Assembly:

I am returning Assembly Bill 1868 without my signature.

This bill would prohibit the Insurance Commissioner from approving any disability or

life insurance policy if it includes a provision that would reserve discretionary authority

to the insurer to determine eligibility for benefits, and voids certain provisions of a policy

or agreement if it provides or funds life insurance or disability insurance coverage.

This bill is unnecessary, as the Insurance Commissioner already has the authority to

prohibit the use of discretionary clauses.

For this reason I cannot sign this bill.

Sincerely,

Arnold Schwarzenegger

Third-Party ERISA Administrator Abused Discretion by Denying Medical Coverage: A Tale of What Not to Do

Get the Answers and Assistance You Need