Court Denies Insurer’s Motion to Dismiss, Finding Plan Language Did Not Clearly Require Administrative Exhaustion Prior to Filing Suit

Ordinarily, a participant or beneficiary of a plan governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) must avail himself or herself of the plan’s internal review procedures before bringing a civil action in federal court for recovery of plan benefits.  This includes group ERISA plans offering long-term disability, life, health or accidental death benefits.  Although ERISA does not explicitly require exhaustion of administrative remedies, federal courts have held that an ERISA plan participant must exhaust the plan’s administrative appeal procedure before filing a federal lawsuit.  See Vaught v. Scottsdale Healthcare Corp. Health Plan, 546 F.3d 620 (9th Cir. 2008).  However, according to the Ninth Circuit, this exhaustion requirement applies only if the plan itself requires exhaustion.  Spinedex Physical Therapy USA Inc. v. United Healthcare of Ariz., Inc., 770 F.3d 1282 (9th Cir. 2014).  But what if the plan documents are ambiguous and it is unclear whether administrative exhaustion is required?  A recent decision grappled with this issue.

In Greiff v. Life Insurance Company of North America, 386 F.Supp.3d 1111 (D. Ariz. July 2019), the Court denied defendant Life Insurance Company of North America’s (“LINA”) motion to dismiss for failure to exhaust administrative remedies, finding that the plan documents were ambiguous as to whether administrative exhaustion was required.  The plaintiff in Greiff sought to recover long-term disability benefits from LINA under a plan governed by ERISA.  LINA moved to dismiss the complaint arguing that the plaintiff had failed to exhaust administrative remedies imposed by the plan.  The plaintiff argued that the plan did not require exhaustion of administrative remedies.

In analyzing the plan language at issue, the Court recognized that the plan terms should be interpreted in an ordinary and popular sense as would a person of average intelligence and experience.  The Court also acknowledged, pursuant to the Ninth Circuit ruling in Spinedex, that where plan documents could reasonably be read as making the administrative appeals process optional, administrative exhaustion is not required.  The Ninth Circuit in Spinedex recognized that claimants may be affirmatively misled by plan language that appears to make the exhaustion requirement permissive when it is in fact mandatory.

In Greiff, to support its position that the plan documents required administrative exhaustion prior to filing a lawsuit, LINA relied on language contained in two sections of a claim procedures rider and language in the denial letter to the plaintiff.  The language relied on in the first section of the claim procedures rider stated that written notice of a claim denial will include:

A statement regarding the right to appeal the decision, and an explanation of the appeal procedure, including a statement of the right to bring a civil action under Section 502(a) of ERISA if the appeal is denied.

The second section of the claim procedures rider stated that:

Whenever a claim is denied, there is the right to appeal the decision.  A written request for appeal must be made to the Insurance Company within 60 days (180 days in the case of any claim for disability benefits) from the date the denial is received.  If a request is not made within that time, the right to appeal will have been waived.

The Court found that this language would not alert an average claimant that failing to exhaust administrative remedies will preclude him from bringing a civil action under ERISA.  With regard to the language in the first section, the Court pointed out that this language pertains to LINA’s obligations, rather than the claimant’s obligations.  Furthermore, the Court stated that informing a claimant that he has a right to appeal is not the same as telling the claimant that he must appeal or he loses his right to prosecute his claim in federal court.  In addition, telling a claimant that he has the right to bring a civil action if the appeal is denied is not the same as telling the claimant that he does not have a right to bring a civil action if he fails to appeal the denial.  The Court determined that the language contained in the claim procedures rider could reasonably be read as making the administrative appeal process optional.

LINA also relied on language contained in a claim denial letter sent to plaintiff which stated, “ERISA requires that you go through the Company’s administrative appeal review process prior to pursuing any legal action challenging our claim determination.”  The denial letter also stated that “[y]ou have the right to bring a legal action for benefits under . . . ERISA . . . following an adverse benefit determination on appeal.”  The Court determined that the language in the denial letter did not constitute terms of the plan because claim denial letters were not among the documents that the plan specified as being part of the contract.  The Court also stated that even if the claim denial letter was a part of the plan documents, the language in the denial letter did not clearly state that the plan required administrative exhaustion.  The Court found the language in the denial letter insufficient to put a claimant on alert that he must exhaust administrative remedies for the same reasons that the language in the claim procedures rider was insufficient – stating that a claimant has a right to bring a legal action after a claim denial does not mean that he does not have a right to bring a civil action in any other circumstance.  In addition, the Court noted that although the denial letter stated that ERISA required a claimant to go through the administrative appeal process as a prerequisite to filing suit, it did not clearly indicate that the plan required such exhaustion.

The Court in Greiff ruled that because the language at issue was ambiguous and could reasonably be read as making the administrative appeals process optional, the plan did not require administrative exhaustion, and, accordingly, LINA’s motion to dismiss was denied.  As always, claimants should be extremely careful to ensure that all required administrative appeals are exhausted before filing a federal civil action.  However, should claimants find themselves facing allegations that they did not exhaust administrative remedies, they should look closely to the plan language to determine if administrative exhaustion is clearly required.

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