ERISA - Standard of Review Archives - Page 2 of 4

Ninth Circuit Grants a Small Reprieve to the Abuse of Discretion Standard of Review, Ruling That Discretionary Language Provisions in Self-Funded ERISA Will Apply

When litigating ERISA-governed short-term disability, long-term disability, life and medical insurance claims, a major consideration is which “standard of review” will apply to the Court’s review of the insurer’s decision – abuse of discretion or de novo. The de novo standard of review is more claimant friendly. When applying the abuse of discretion standard of review, the Court is required to give some deference to the insurer’s decision. Under the de novo standard of review, the Court does not give any deference to the insurer’s decision, but simply makes a determination as to whether available evidence establishes that the insured was disabled under the terms of the Plan.

The abuse of discretion standard of review, which is friendlier to insurers, only applies if the ERISA plan contains “discretionary language” generally stating that the insurer has total discretion to interpret the terms of the Plan and decide whether the claimant is entitled to policy benefits. However, in 2011, California enacted Insurance Code section 10110.6, which banned discretionary clauses in ERISA plans issued or renewed on or after January 1, 2012. Since that time, District Courts in California and the Ninth Circuit have repeatedly ruled that Insurance Code section 10110.6 was valid and enforceable, most recently in Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, 856 F.3d 686 (9th Cir. 2017). See our article on this case here. Unfortunately, with this ruling, the Ninth Circuit opened the door for the abuse of discretion standard of review to apply in a limited number of cases where employers provide group disability insurance and life insurance coverage which they fund.

Williby v. Aetna Life Insurance Co., 2017 WL 3482390 (9th Cir. August 15, 2017) involved a claim for short-term disability benefits made under a self-funded group short-term disability insurance plan. “Self-funded” means that the employer (here, Boeing) did not purchase an insurance policy to cover its plan obligations, instead committing to pay any benefits “from its own coffers.”

After Williby’s STD claim was denied, she filed a lawsuit seeking past-due benefits. At trial, the District Court Judge ruled that Insurance Code section 10110.6 invalidated the discretionary language in the STD Plan, and applied the de novo standard of review when ruling that Williby was entitled to STD benefits.

Aetna, the company Boeing hired to administer the ERISA plan, appealed the District Court’s decision, arguing that ERISA preempted the application of Section 10110.6 to self-funded plans. In considering Aetna’s argument, the Ninth Circuit offered a brief discussion of three interrelated ERISA provisions governing the preemption of state law – the “preemption clause,” the “saving clause,” and the “deemer clause” – before indicating that the issue would turn on the “presence or absence of traditional insurance.”

Specifically, the Court noted that in FMC Corp. v. Holliday, 498 U.S. 52 (1990), the Supreme Court set forth a “simple, bright-line rule: ‘if a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer’s insurance contracts; if the plan is uninsured, the State may not regulate it.’” Thus, because the Boeing Plan was self-funded and not insured, state insurance regulations operating on a self-funded plan – like Section 10110.6 – are preempted. The Court accordingly ruled that the District Court applied the incorrect standard of review, and remanded the case back to the District Court for further consideration.

While this ruling does give limited life to the abuse of discretion standard in some California-litigated ERISA cases, in reality, the McKennon Law Group does not believe this will significantly harm insureds’ ability to successfully recover ERISA benefits through litigation. First, only a small number of group insurance plans are self-funded, so the reach of this ruling will be small. More importantly, we believe that, in practice, there is not much difference between the two different standards of review. Not only does the abuse of discretion standard of review gives claimants the ability to obtain helpful information through discovery, but we believe that if judges are convinced that a claimant is really totally disabled, they will rule in favor of the claimant no matter the standard.

9th Circuit puts final nail in coffin for discretionary clauses in insurer-funded ERISA plans

Disability and life insurers frequently include clauses in their insurance policies affording them complete discretion to decide whether a claim has merit. The clauses usually state the insurer has total discretion to decide whether the claimant is eligible for the policy’s benefits, to decide the amount, if any, of benefits to which they are entitled, to interpret the policy’s terms how they see fit, or something similar. Employers regularly include these same types of “discretionary clauses” in their employee welfare benefit plan documents, and if a group insurance policy is the funding source of the plan’s benefits, they then delegate that discretion to decide the merits of claims to the insurer.

Employee benefit plans and the corresponding group insurance policies that fund them are governed by a federal law, the Employee Retirement Income Security Act of 1974 (“ERISA”), codified at 29 U.S.C. section 1001, et seq. The result of these discretionary provisions in ERISA cases, until recently, has been that a federal court reviewing the insurance company’s claim decision had to give deference to whatever the insurer decided, even if the court disagreed with the insurer’s decision, unless the insurer abused its discretion by acting arbitrarily and capriciously. The district court was required to apply an “abuse of discretion” or “arbitrary and capricious” standard of review rather than a de novo standard (where no such deference to the insurer’s decision is given). The former standard, obviously, is much more difficult than the latter for an insured to meet. While a district court applying an abuse of discretion standard to the insurer’s claim decision is not required to “rubber stamp” it with no oversight, its ability to overturn the decision is far more limited than when reviewing the insurer’s decision de novo.

In most types of insurance policies, insurers have not been so brazen to include these draconian insurer discretionary provisions. It is astonishing that the California legislature let disability and life insurers get away with this practice for so long. The clauses directly contravene many “black-letter” pro-policyholder California insurance laws (such as the doctrine that ambiguous policy provisions must be strictly construed against the insurer as the drafter). Think about it. Under these provisions, the company legally responsible to pay an employee’s or beneficiary’s benefit claim also has nearly unchecked power to decide whether the claim has merit and to interpret the plan’s provisions. From the standpoint of a California policyholder and their counsel, that is shocking, truly shocking. It demonstrates the power of the insurance company lobby.

Not surprisingly, these discretionary provisions lead to a higher rate of claim denials by disability and life insurers than in other types of policies and, in our opinion, industry wide abuse, particularly for disability insurers. The U.S. Department of Labor estimates that a whopping 75 percent of long-term disability claims are denied. The statistics seems to provide empirical support for Lord Acton’s famous phrase uttered in the 1800’s, “power tends to corrupt and absolute power corrupts absolutely.”

On January 1, 2012, no doubt aware of this potential for abuse by insurers, the California legislature decided to put an end to discretionary provisions in disability and life insurance contracts. It enacted California Insurance Code section 10110.6, which made void and unenforceable any grant of discretionary authority to an insurer or agent of the insurer in “a policy, contract, certificate, or agreement” that provides or funds disability or life insurance coverage for California residents. More than a dozen states have similar laws, as noted in Standard Ins. Co. v. Morrison, 584 F.3d 837, 841 (9th Cir. 2009) (upholding Montana Insurance Commissioner’s practice of disapproving disability insurance policy forms with clauses vesting discretion in insurers). These states include California, Connecticut, Hawaii, Idaho, Illinois, Indiana, Kentucky, Maine, Maryland, Montana, New Jersey, New York, South Dakota, Texas, Utah, Vermont, Washington, Wyoming and perhaps others (some bar discretionary clauses in health insurance or other types of policies, not just in disability and life insurance policies). Several of these states banned or limited discretionary clauses in response to a notorious example of one insurer who, to boost its profits, had intentionally used discretionary clauses to repeatedly deny claims it knew were valid. See Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 867 (9th Cir. 2008).

Despite California’s statutory ban on insurer discretionary clauses, group disability and life insurers have steadfastly challenged the statute’s application to ERISA-governed policies and related employee welfare benefit plan documents. They routinely argue that ERISA preempts the State law, the statutory ban applies just to insurance policies but not plan documents, and other creative arguments, all to sustain the status quo of their mostly unfettered power to decide claims with little scrutiny by courts. Their arguments have been repeatedly rejected by most California federal district courts. A few rogue courts in the minority have agreed with the insurer’s creative arguments. This left, until now, some uncertainty about what the law in the 9th Circuit is for California employees.

On May 11, 2017, the 9th Circuit put the final nail in the coffin for grants of discretionary authority to insurers in ERISA-governed insurance policies and employer plan documents. Orzechowski v. Boeing Co. Non-Union Long-Term Disability Plan, No. 14-55919, 2017 DJDAR 4376 (9th Cir. May 11, 2017). In that case, The Boeing Company (“Boeing”) offered its employees long-term disability coverage through an ERISA-governed plan. Boeing purchased a group disability insurance policy from Aetna Life Insurance Company (“Aetna”) to fund the plan’s disability benefits and vested Aetna with discretion to decide the merits of benefit claims. Aetna’s policy granted it discretionary authority to “review all denied claims,” “determine whether and to what extent employees and beneficiaries are entitled to benefits,” and “construe any disputed or doubtful terms of the policy.” The policy further specified that, “Aetna shall be deemed to have properly exercised such authority unless Aetna abuses its discretion by acting arbitrarily and capriciously.” Boeing’s principal plan document, The Boeing Company’s Master Welfare Plan (“Master Plan”), similarly contained a broad grant of discretionary authority delegated to Aetna which included the power to “determine all questions that may arise including all questions relating to the eligibility of Employees and Dependents to participate in the Plan and amount of benefits to which any Participant or Dependent may become entitled.” In short, the group policy and employer’s plan document each gave Aetna fairly unchecked power to decide the merits of claims, the claims Aetna was responsible to pay.

A Boeing employee, Talana Orzechowski, submitted a claim for disability benefits under the plan because she suffered from physical illnesses, chronic fatigue syndrome and fibromyalgia, and could no longer perform her job duties as a result. After paying the claim for two years, Aetna decided to terminate her benefits based upon the plan’s 24-month limit for disabilities primarily caused by mental illness. Aetna determined Ms. Orzechowski’s condition was not physical but only mental based upon the opinions of medical consultants it hired to review her medical records. Aetna disagreed with Ms. Orzechowski’s treating physicians. They concluded after examining her in-person that she had a physical disability and that her mental illness, depression and anxiety, was secondary to her physical problems, chronic fatigue syndrome and fibromyalgia.

Ms. Orzechowski filed suit in federal district court under ERISA to recover her disability benefits. Following a bench trial, the trial court upheld Aetna’s benefit decision. It reviewed Aetna’s decision for an abuse of discretion (because Boeing’s Master Plan gave Aetna discretionary authority), rather than de novo, the default standard in an ERISA case.

The 9th Circuit held the district court should have applied a de novo standard of review to Aetna’s claim decision. It ruled that California Insurance Code section 10110.6 voided the discretionary provisions in both Aetna’s insurance policy and Boeing’s plan documents, including in the Master Plan. It reversed the district court’s decision and remanded the case for it to review the insurer’s claim denial de novo, with instructions to focus on Ms. Orzechowski’s physical illnesses that Aetna had ignored when terminating her benefits.

ERISA Preemption and Savings

The 9th Circuit rejected Boeing’s argument that ERISA preempts the California statute. The Court reasoned that while the California law comes within ERISA’s broad preemption clause, which preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan,” 29 U.S.C. § 1144(a), ERISA’s savings clause saved the California law from preemption. The savings clause saves from preemption “any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A). For the savings clause to apply, the State law must satisfy a two-part test set forth in Kentucky Association of Health Plans v. Miller, 538 U.S. 329, 342 (2003). First, the State law must be specifically directed toward entities engaged in insurance, and second, the law must substantially affect the risk pooling arrangement between the insurer and insured. After some very technical arguments, the Orzechowski Court held the California statute meets both prongs of the Miller test, “regulates insurance,” and, therefore, is saved from ERISA preemption.

Statute Interpretation Arguments

The Court rejected Boeing’s other arguments that section 10110.6 did not void the discretionary clause in the Master Plan because it (1) only voids discretionary clauses in insurance policies but not in employer plan documents, and (2) is not retroactive and became effective on January 1, 2012 after the January 1, 2011 Master Plan. The Court reasoned the California statute, by its terms, covers not only “policies” that provide or fund disability insurance coverage but also “contracts, certificates, or agreements” that do so. It cited to 9th Circuit precedent holding that an ERISA plan is a “contract” and concluded Boeing’s Master Plan falls under section 10110.6, not just Aetna’s policy.

The Court rejected Boeing’s second argument because the California statute, while not retroactive, voids discretionary provisions in any policy “or contract” that renews after the statute’s effective date of January 1, 2012. The statute defines “renewed” as “continued in force on or after the policy’s anniversary date.” The policy’s anniversary date was January 1, 2012 and the Master Plan continued in force thereafter. The Master Plan, a contract, thus “renewed” after the statute’s effective date.

Conclusion

While Orzechowski marks the end of an era – that had allowed discretionary clauses in insurer-funded employee benefit plans providing disability and life coverage to California residents – there is still an open question whether California’s statutory ban will be extended to self-funded plans. Orzechowski did not reach that issue. Many large employers fund their benefit plans with their own money rather than through an insurance policy. Thus, even after Orzechowski, employers and their self-funded plans will continue to argue California’s ban does not apply to them. The debate remains alive and well in California (for self-funded plans) and, for both insurer- and self-funded plans, in most states because they have not enacted similar laws to California’s statute.

One thing we know for certain based on the 9th Circuit’s Orzechowski decision: discretionary clauses are void and unenforceable in insurer-funded ERISA employee benefit plans providing disability or life coverage for California residents, whether the clause appears in the insurer’s group policy, the employer’s separate plan document or both. Federal judges will thus have to start applying a standard of review more favorable to claimants, de novo, in insurer-funded ERISA plans. This will probably lead to better results for claimants in litigated cases and, potentially, less claim denials from group disability and life insurers in the first instance.

Robert McKennon Publishes Article: Ninth Circuit: ‘Independent’ Physicians may Favor Insurers

In the September 8, 2016 edition of the Los Angeles Daily Journal, Robert McKennon of the McKennon Law Group published an article regarding the use of so-called “independent” physicians used by insurance companies as a pretense to deny valid claims. In the article entitled “9th: ‘Independent’ Physicians may Favor Insurers,” Mr. McKennon summarized the recent U.S. Court of Appeals for the Ninth Circuit case, Demer v. IBM Corporation LTD Pan, 2016 DJDAR 8929 (9th Cir. Aug. 29, 2016), in which the Court noted that insurance companies frequently pay doctors a substantial amount of money to review files, and therefore their opinions are likely biased in favor of the insurance company that pays them.

The article is postedbelowwith the permission of the Los Angeles Daily Journal.

9th: ‘Independent’ Physicians may Favor Insurers

By Robert J. McKennon

Insurance companies that provide group long-term disability insurance benefits governed by the Employee Retirement Income Security Act of 1974 (ERISA) usually hire a doctor which they typically refer to as an “Independent Physician Consultant” (IPC) to review the insured’s medical records and give an opinion about whether the insured is disabled. But is the insurance company’s doctor really independent and unbiased? Often times, the IPC never meets with or examines the insured, and does not even discuss the matter with the insured’s physicians. Yet, the IPC determines that the insured is capable of working simply by spending a few hours reviewing his medical records. The IPC typically disagrees with the opinions of the insured’s treating physicians, who have treated the insured for months or even years. Almost invariably, the insurer favors the opinion of its IPC over the opinions of the insured’s physicians. When this happens, what is an insured to do?

In a published opinion favorable to insureds that addresses this issue,Demer v. IBM Corporation LTD Pan, 2016 DJDAR 8929 (Aug. 29, 2016), the 9th U.S. Circuit Court of Appeals demonstrated that it understands that insurance companies frequently use doctors and pay them a substantial amount of money for their services, and therefore their opinions are likely biased in favor of the insurance company that pays them. The 9th Circuit held that a district court’s review of an insurance company’s benefits decision, when it is based upon the opinion of an IPC, should be tempered by skepticism because of the financial incentive that the IPC has to pander to the insurer’s interests (again, who uses them often and pays them significant amounts of money).

InDemer, the plan participant, Daniel Demer, was an employee of IBM Corporation LTD Plan. Suffering from severe recurrent depression, spinal stenosis, chronic osteoarthritic pain, and chronic headaches and unable to continue working, he filed a claim for long-term disability benefits. MetLife, which had a structural conflict of interest because it both evaluated claims made against the plan and funded claims, initially approved his claim after concluding he was incapable of performing the duties of his occupation. However, after two years, the plan required that Demer be unable to work in any occupation for which he was suited by education, training and experience in order to qualify for benefits, and MetLife denied his claim relying primarily on the opinion of its IPC indicating that despite his supported functional limitations, Demer was capable of working in a sedentary position.

Demer appealed MetLife’s claim denial, and MetLife subsequently upheld its denial relying on the opinions of two other IPCs. One of the IPCs was board certified in physical medicine and rehabilitation. He determined that while Demer “likely had a modicum of discomfort” from “neck and back pain related to spinal degeneration,” he retained physical functional capacity to perform a sedentary occupation despite a contrary conclusion from Demer’s treating physician. MetLife’s other “independent” physician consultant, board certified in psychiatry, claimed that despite the fact that Demer was taking powerful narcotic and neurological medications and asserted that he suffered from significant medication side-effects that cause fatigue and an impediment to his comprehension and communication, there was no objective data to establish functional impairment as a result of the medications he was taking.

Demer filed suit, arguing in part that MetLife operated under a conflict of interest because two of the IPCs that MetLife hired to review the medical record previously conducted a substantial number of reviews for Metlife and received significant compensation from MetLife for their services. For 2009 and 2010, one IPC performed more than 250 reviews/addendums per year, earning more than $125,000 each year. For the same time period, the other IPC performed between 200-300 reviews/addendums each year, and received more than $175,000 from MetLife each year. Based on the number of reviews and the amount of compensation, Demer asserted that the IPCs’ opinions should be questioned because the doctors had financial incentives to render opinions favorable to MetLife. Demer further argued that, because MetLife relied on the doctors’ opinions in denying him relief, the doctors’ conflict is imparted to MetLife and therefore the court should view their opinions with skepticism. The court noted that this argument is comparable to conventional approaches to discrediting the testimony of retained experts whose objectivity may be challenged based on the number of times he or she has served as an expert in support of a party and the amount of compensation received.

The district court entered judgment in favor of IBM and MetLife finding no abuse of discretion, but the 9th Circuit reversed. Thec court concluded that because MetLife’s consulting physicians earned a substantial amount of money from, and performed numerous medical record reviews for, MetLife, an inference was raised that there was a financial conflict which influenced the physicians’ assessment. It held that this conflict was a factor to be considered in reviewing MetLife’s decision under the abuse of discretion standard. Since MetLife failed to negate any inference of a financial conflict of interest, the court determined that “the number of examinations referred and the size of the professional fees paid to a reviewer may compromise the neutrality of an expert.”

The court further concluded that MetLife abused its discretion in denying Demer’s claim that his mental functional capacity was affected by his medications. The court determined that since it was undisputed that Demer took powerful narcotic medications, that these medications were medically necessary, and because they have known strong side-effects, MetLife’s conclusion (that Demer’s complaints regarding medication side-effects was not credible) was unsupported. A dissent disagreed, and stated that he would abandon “skepticism” as a separate standard of review in ERISA cases.

Even though theDemercase involved the abuse of discretion standard of review, insurers will argue that this case will have little application in de novo review cases in which the conflict analysis is not used. In California, the abuse of discretion standard of review will likely become uncommon in future cases because of California Insurance Code Section 10110.6, which renders discretionary language “void and unenforceable” in policies, contracts and certificates that provide funds for life insurance or disability insurance coverage for California residents. However, even in de novo review cases, it is advisable to remind the courts of the rationale behind the “skepticism” rule as even the 9th Circuit noted the similarity to the arguments made in non-ERISA cases. Thus, this case is useful to establish that the opinion of an insurance company IPC who never examined the insured and who undermines or rejects an insured’s credible evidence of disability should be viewed skeptically where the insured’s disability is supported and verified by the insured’s treating physicians who treated and examined the insured.

With Discretionary Language Even Barred in Self-Funded ERISA Plans, is This the Death of The Abuse of Discretion Standard of Review In California?

Recently, we explained that District Courts within the state of California, applying California Insurance Code section 10110.6, ruled that, even if an insurance Plan contains language giving discretion to a claim administrator, that language is unenforceable, and de novo is the proper standard of review. See The Death of the Abuse of Discretion Standard of Review in ERISA Disability Insurance Cases in California. A recent ruling expanded the application of California’s anti-discretionary language statute to self-funded plans, further signaling the end of the abuse of discretion standard of review in California Federal Courts.

In Williby v. Aetna Life Insurance Company, 2015 WL 5145499 (C.D. Cal. August 31, 2015), the plaintiff initiated the lawsuit after Aetna denied her claim for short-term disability (“STD”) benefits. The facts of the benefits dispute are fairly straightforward, and the District Court eventually ruled that Aetna’s decision to deny the plaintiff’s claim for STD benefits was improper, regardless of the standard of review. What is unique about the ruling is the District Court’s application of California Insurance Code section 10110.6.

The ERISA Plan in Williby was a self-funded plan. This means that the employer, not Aetna, was responsible for paying any disability benefits due under the Plan. Aetna argued that Insurance Code section 10110.6 did not apply to self-funded plans, but only insured plans (where the claims administrator/insurer, not the employer, is responsible for any benefits payable under the Plan). This argument was based on the language in the statute that bars provisions which “reserve[] discretionary authority to the insurer.” See Insurance Code section 10110.6(a). The Court disagreed with Aetna’s interpretation of the statute, instead holding that the California State Legislature intended for the statute to apply, not only to insurance policies, but also insurance contracts. Specifically, the Court explained:

[P]rovisions that reserve discretionary authority to insurers to determine eligibility for benefits in contracts or policies in effect after January 1, 2012, are void and unenforceable under California Insurance Code § 10110.6.

…

Defendant argues that the insurance code does not apply because (1) the STD benefits are self-funded by Boeing, and (2) Aetna is granted discretion by the Plan, which is not an insurance policy, and thus, not regulated by the insurance code. Several district courts have found, although not in the context of self-funded plans, that Section 10110.6 applies to ERISA plan documents because the statute expressly applies to contracts and insurance policies. A federal court interpreting a state statute gives the language of the statute its “usual, ordinary import,” but if the statute’s wording is ambiguous, it may consider extrinsic evidence of legislative intent. In re First T.D. & Inv., Inc., 253 F.3d 520, 527 (9th Cir. 2001). Section 10110.6 by its plain language applies to any insurance policy, contract, certificate or agreement, and “an ERISA plan is a contract.”Harlick v. Blue Shield of Cal., 686 F.3d 699, 708 (9th Cir. 2012). The statute’s legislative history reinforces its application to employer-sponsored ERISA plans. A report from a June 22, 2011, hearing refers to an opinion letter from the Insurance Commissioner’s counsel that explained: “in group, employer-sponsored disability contracts that are governed by ERISA, the presence of a discretionary clause has the legal effect of limiting judicial review of a denial of benefits to a review for abuse of discretion. . . .[t]his standard of review deprives California insureds of the benefits for which they bargained, access to the protections of the Insurance Code[,] and other protections in California law.” See June 22, 2011, Senate Bill No. 621. The Court finds that the provisions conferring discretionary authority to Aetna are void and unenforceable pursuant to Cal. Ins. Code § 10110.6. Because the Court finds the provisions conferring discretionary authority to Aetna are void and unenforceable, the Court reviews whether Aetna correctly or incorrectly denied benefits de novo. See Firestone, 489 U.S. at 957; see also Abatie, 458 F.3d at 963. (Emphasis added.)

This ruling is further proof that the abuse of discretion standard of review will no longer apply in a vast majority of the ERISA cases filed in Federal Courts in California.

If your claim for short-term disability insurance or long-term disability insurance was denied, you can call (949) 387-9595 for a free consultation with the attorneys of the McKennon Law Group, several of whom previously represented insurance companies, who are exceptionally experienced in handling ERISA short-term and long-term disability insurance litigation.

ERISA Disability Insurance Claimants Take Note – Discovery Is Allowed In De Novo Review Cases

Well-intentioned policymakers enacted the Employee Retirement Income Security Act of 1974 (“ERISA”) over forty years ago to provide for the protection of participants’ employee benefits in part by establishing a uniform set of rules to ensure efficient proceedings. One of these notable rules limits the scope of permissible evidence for actions commenced under ERISA section 502(a)(1)(B). This scope of evidence further depends on whether the reviewing federal court employs an abuse of discretion, or de novo, standard of review. Because discovery can be an expensive and time consuming process, insurers and claims administrators often take the position that discovery is irrelevant and not permitted under ERISA. As the cases below show, although limited, discovery is not forbidden in de novo review cases and ERISA claimants should actively seek discovery, taking care to clearly explain why the discovery sought is necessary to a de novo review.

Recently-enacted section 10110.6 of the California Insurance Code and subsequent cases have ushered in a new era where de novo review has become the de jure standard for ERISA cases filed in California. Briefly, California Insurance Code section 10110.6 holds that any policy or agreement for “disability insurance coverage” offered, issued or renewed after January 1, 2012 to “any California resident” conferring discretionary authority upon the insurer or claim administrator shall have those discretionary provisions stricken. For further discussion of this issue, see our article The Death of the Abuse of Discretion Standard of Review in ERISA Disability Cases in California.

Generally, a court reviewing a disability insurance denial de novo “simply proceeds to evaluate whether the plan administrator correctly or incorrectly denied benefits.” Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 963 (9th Cir. 2006). This consists of an independent review of whether the Administrative Record, or claim file developed during the appeal, supports a finding of disability, without deference to the insurer’s decision. Subsequently, after complying with their duties under Section 503 of ERISA to turn over the Administrative Record, insurers often adopt the position that discovery beyond the Administrative Record is inappropriate, because the inquiry is whether the insurer reached the correct decision based on the Administrative Record, so extrinsic evidence is irrelevant under Federal Rule of Civil Procedure 26(b)(1). However, this blanket statement is untrue.

In many cases where a district court reviews the denial decision de novo “additional evidence is not necessary for adequate review of the benefits decision, [and] the district court should only look at the evidence that was before the plan administrator … at the time of the determination.” Mongeluzo v. Baxter Travenol Long Term Disability Benefit Plan, 46 F.3d 938, 944 (9th Cir.1995). However, courts have allowed relevant discovery under beyond the administrative record in “certain limited circumstances.” Opeta v. Northwest Airlines Pension Plan, 484 F.3d 1211, 1217 (9th Cir. 2007). Opeta and its progeny proffered a non-exhaustive list of exceptional circumstances where extrinsic evidence may be relevant, including resolving complex medical questions, issues regarding the credibility of medical experts, the availability of very limited administrative review procedures with little or no evidentiary record; the necessity of evidence regarding interpretation of the terms of the plan rather than specific historical facts; instances where the payor and the administrator are the same entity and the court is concerned about impartiality; claims which would have been insurance contract claims prior to ERISA; and circumstances in which there is additional evidence that the claimant could not have presented in the administrative process. As reflected by Knopp v. Life Insurance. Co. of North America, 2009 WL 5215395 (N.D. Cal. Dec. 28, 2009) and other cases, courts have extended Opeta to mean that if evidence is admissible, it is also discoverable.

Indeed, Waggener v. Unum Life Insurance Co. of America, 238 F. Supp. 2d 1179 (S.D. Cal. 2002) held that district courts have discretion to consider evidence outside the record when conducting a de novo review of an ERISA benefits decision, and should exercise its authority to consider additional evidence when the circumstances clearly establish the necessity of that evidence to an adequate de novo review of the decision. See also Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 969 (9th Cir. 2006) (permitting consideration of new evidence in conjunction with de novo review of a denial of benefits); Mongeluzo v. Baxter Travenol Long Term Disability Benefit Plan, 46 F.3d 938, 944 (9th Cir.1995) (holding a district court has discretion to allow extrinsic evidence “‘only when circumstances clearly establish that additional evidence is necessary to conduct an adequate de novo review’”) (internal quotation marks omitted).

Numerous courts have permitted ERISA claimants to conduct discovery similar to the discovery propounded by Mr. Lawrence, even when applying the de novo standard of review. Specifically, courts have allowed discovery designed to ascertain whether the vendors and/or medical reviewers hired by an insurer were biased, and whether the claims administrator’s inherent conflict of interest influenced its decision, or choice of medical reviewers in any way. For example in Anderson v. Sun Life Assurance Co. of Canada, 2012 U.S. Dist. LEXIS 158689 (D. Ariz. Nov. 2, 2012), the district court ruled that “discovery into the potential bias of the medical reviewers utilized by Sun Life is appropriate,” as well as discovery into “Defendant Sun Life’s alleged conflict of interest and how that conflict may have affected the handling of Plaintiff’s claim.” In Brice v. Life Insurance Co. of North America, 2011 U.S. Dist. LEXIS 77525 (N.D. Cal. July 18, 2011), the district court allowed discovery with respect to the possible bias of a physical therapist hired by the insurer.

Similarly, in Gonda v. Permanente Medical Group, Inc., 300 F.R.D. 609 (N.D. Cal. 2014), the district court, reviewing the a disability denial decision de novo, permitted the plaintiff to conduct discovery regarding the number of benefit claims in which an independent medical evaluator performed professional services, the amount of compensation paid to the evaluator for professional services in the evaluation of disability benefits claims over several years and all documents and information considered by PsyBar (the third party vendor that retained the evaluator) in the selection of this evaluator to review Dr. Gonda’s benefits claim or any facts or medical records pertaining to Dr. Gonda’s claim. See also Rutherford v. Scene 7 Inc. Long Term Disability Plan, 2008 U.S. Dist. LEXIS 55351 (N.D. Cal. Jul. 18, 2008) (allowing the plaintiff to take the deposition of a medical examiner who concluded plaintiff exhibited “symptom magnification” to evaluate his credibility); Deldebbio v. Walgreens Co., 2012 U.S. Dist. LEXIS 28795 (N.D. Cal. Mar. 5, 2012) (allowed PMK deposition of person with knowledge of the relationship between the administrator and the Plan, as well as a written deposition of the reviewing physicians).

These cases show claimants that limited discovery is available under a de novo review case.

Insurers Do Not Have Discretionary Authority, Absent Clear Language in Official Plan Documents

In actions brought under the Employee Retirement Income Security Act of 1974 (“ERISA”), two roads diverge in federal court—and the court’s choice regarding the applicable standard of review can make all the difference in the scope of permissible evidence. If the court applies the abuse of discretion standard of review, the court more typically (but not always) only considers evidence received by the insurer in time for its decision and limits its review to the “administrative record” to determine whether the insurer’s denial was an abuse of discretion. Alternatively, the court may review a case “de novo,” and may consider documents not previously provided to the insurer to determine whether the insured is entitled to benefits.

Prior case law holds a district court must review a plan administrator’s decision de novo, “unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits.” Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). The Ninth Circuit Court of Appeals expanded upon this holding, by defining what constitutes the “benefit plan.” The Ninth Circuit clarified that where a Summary Plan Description (“SPD”) which was not defined as an official plan document unambiguously granted discretionary authority to a plan administrator to decide claims, but an insurance certificate, an official plan document, did not grant discretionary authority, the official plan document governed. Because the governing plan document, the insurance certificate, did not grant the insurer discretionary authority, the district court was required to review the case de novo. Prichard v. Metropolitan Life Ins. Co., 2015 U.S. App. LEXIS 6553 (9th Cir. Apr. 21, 2015). Prichard is significant as the de novo standard is arguably more favorable to insureds, because it not only provides a less deferential standard of review, but insureds may be able to conduct discovery and supplement the administrative record to offer evidence that administrators acted with bias or to bring in additional medical evidence to support a disability.

Prichard involved a fairly standard ERISA claim by Matthew Prichard, an insured, against Metropolitan Life Insurance Company (“MetLife”) for his long-term disability insurance benefits. Prichard’s policy contained a 24-month benefits period for mental limitations. Prichard filed for, and received, benefits for his psychiatric disability for a period just shy of 24 months. Subsequently, MetLife requested additional information demonstrating Prichard was disabled due to non-limited conditions, received his updated medical records and decided there was insufficient medical evidence to support his claim. Prichard appealed unsuccessfully, then brought suit for a continuation of his ERISA benefits under 29 U.S.C. section 1132(a)(1)(B).

The district court addressed whether the applicable standard of review was de novo or abuse of discretion. MetLife pointed to unambiguous language in its SPD granting the plan fiduciary “discretionary authority to interpret the terms of the Plan,” and argued for the abuse of discretion standard of review. Prichard argued the Supreme Court holding in CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011) stating the terms of plan summaries may not be enforced as the plan itself precluded MetLife from asserting that the SPD language was the Plan language. Prichard further argued that no other plan documents conferred discretionary authority on MetLife, and therefore the district court should review the case de novo. The district court found the SPD was a governing plan document which unambiguously granted MetLife discretionary authority to determine claims and benefit eligibility. Applying an abuse of discretion standard of review, the district court held that MetLife did not abuse its discretion in denying Prichard disability benefits. Prichard timely appealed.

The Ninth Circuit Court of Appeals reversed, explaining that a district court must review a plan administrator’s denial of benefits de novo, unless the benefit plan gave the administrator discretionary duty to determine eligibility for benefits. The Court noted that Amara involved a dispute in which there was an SPD and a written plan instrument, and the plan administrator sought to enforce the SPD’s terms over those of the plan instrument. MetLife sought to enforce the SPD as the one and only formal plan document. It argued that previous federal court decisions have accepted the SPD as the formal plan document where the terms of the SPD did not add to, or contradict, the terms of existing Plan documents. In light of these decisions, the Court explained that the SPD terms do not govern if they conflict with governing plan documents, and similarly, the SPD cannot create terms beyond those in the governing plan documents. However, the Court rejected MetLife’s argument that the SPD and the plan “are one and the same.” The Court determined that the SPD clearly stated the only plan documents are 1) a Group Policy (including the certificate), 2) IBM’s application and 3) any amendments or endorsements to the Group Policy. The Court noted that while the insurance certificate was plainly listed as a plan document, “[c]onspicuously absent from this exclusive list was the SPD.” Further, MetLife carried the burden of providing other official plan documents, such as a document containing the discretionary language, but failed to do so. As such, the SPD was the only plan document provided to the Court, and it did not grant discretionary authority to MetLife. The court also noted that “the SPD itself declares ‘official plan documents. . . remain the final authority’ and ‘shall govern’” if the SPD terms conflict with official plan documents. Finally, the Court of Appeal stated:

Because the official insurance certificate contains no discretion-granting terms, we will not, consistent with Amara, hold that the SPD’s grant of discretion constitutes an additional term of the Plan.

Accordingly, the Court held the district court erred in reviewing MetLife’s denial under the abuse of discretion standard of review, and remanded for a de novo review.

While Prichard turned on a technical distinction—what constitutes an official plan document, it affirms the idea that an insurer does not have discretionary authority absent clear language in official plan documents. Therefore, unless an insurer establishes it has discretionary authority under such documents, a court must apply a de novo standard of review. This de novo standard can be outcome determinative.

Get the Answers and Assistance You Need