Judge Dale Drozd of the Eastern District of California recently brought at least some clarity to authority that in the past has allowed for only a murky, muddled understanding of how courts may handle issues of financial conflicts of interest and procedural irregularities in the context of ERISA disability claims, in Chacko v. AT&T Umbrella Benefit Plan No. 3, __ F.Supp.3d. __, 2023 WL 5806455 (E.D. Cal. Sept. 7, 2023).

The Plaintiff, Ruby Chacko, had been a software engineer for twenty years when she began experiencing severe pain in her eyes, neck, shoulders, and arms, as well as blurred vision, prompting her to file claims for short-term disability (“STD”) and long-term disability (“LTD”) benefits, which claims were initially approved by AT&T’s third-party claims administrator Sedgwick Claims Management Services, Inc. (“Sedgwick”). However, Sedgwick then terminated her LTD benefits after only three months on the basis that the medical evidence did not support ongoing benefits. After Sedgwick also denied her appeal, Ms. Chacko filed suit to recover her LTD benefits. Using an “abuse of discretion” standard of review, the court found that Ms. Chacko is entitled to receive LTD benefits because Sedgwick and the defendant AT&T Umbrella Benefit Plan No. 3 (“Plan”) abused their discretion in denying the claim. The two main issues the court addressed were the reviewing physician’s conflict of interest and procedural irregularities during Sedgwick’s review of the claim.

As to financial conflict of interest, the court concluded that Sedgwick’s reviewing physician, Dr. Howard Grattan, had a financial conflict of interest, not based on the amount the doctor was paid to perform a review and provide an opinion, but rather, on how much he had billed Sedgwick over a period of two years prior to his review in this matter, during which he concluded over 80% of the time that the claimant was not disabled. Ms. Chacko argued that “when the statistics show that a doctor finds an overwhelming number of claimants alleging disability to be capable of work, the court can infer from this that the doctor harbors significant bias towards finding a claimant capable of working.” Id. at *18-19. Relying on Demer v. IBM Corp. LTD Plan, 835 F.3d 893, 902 (9th Cir. 2016) (finding a financial conflict of interest where the independent physician consultants earned $125,000–$175,000 annually based on performing 200–300 reviews/addendums each year), the court agreed and noted that a financial conflict of interest’s severity is determinative of how much weight the court should give when factoring such a conflict of interest into its analysis. The reviewing physician had billed Sedgwick a relatively low amount over those two years and during that time, the proportion of claimants the physician found to be disabled was extremely low, but not as low as in the examples Ms. Chacko provided to the court. Thus, having considered these factors, the court found that there was “a conflict of interest surrounding [the physician’s] review of [Ms. Chacko’s] medical records that warrants a low-to-moderate level of skepticism,” indicating that the concept of a financial conflict of interest should be viewed on a sliding scale as opposed to a binary analysis that would result in either the existence of a conflict, or no conflict. By doing this, the court could then identify where the conflict lies on this sliding scale and apply the appropriate amount of deference, and skepticism, to the plan administrator’s claim determination.

The court then addressed the procedural irregularities in Sedgwick’s review of Ms. Chacko’s claim. The court’s reasoning was based on the concept that the presence of procedural irregularities in the claim review process brings with it heightened skepticism of the claim review, which tempers the abuse of discretion standard. Again, this factor exists on a sliding scale, such that procedural irregularities may be present that are not egregious enough to warrant de novo review rather than abuse of discretion review, but they will still result in the court giving reduced deference to the plan administrator’s claim decision. The court specified four procedural irregularities that were present in Sedgwick’s claim review process.

First, the court discussed Sedgwick’s failure to consider the physical requirements of Ms. Chacko’s job. Sedgwick had acknowledged the importance of considering the job requirements when evaluating Ms. Chacko’s claim, but it then issued a denial letter indicating that it did not consider those physical requirements. Rather than discussing the requirements of keyboarding and mousing, Sedgwick instead focused on Ms. Chacko’s job being classified as “sedentary.” Additionally, Sedgwick did not consider the physical requirements of other potential alternative jobs that Ms. Chacko may be able to perform. The court found Sedgwick’s failure to assess whether Ms. Chacko was able to perform the physical requirements of her job, as well as those of potential alternative jobs, to be a significant procedural irregularity.

Second, the court discussed Sedgwick’s reliance on a transferable skills analysis (“TSA”) that failed to consider Ms. Chacko’s keyboarding and mousing limitations despite having already approved her STD and LTD claims based on those limitations. Sedgwick performed four TSAs for Ms. Chacko’s claim; the first two indicated that she was restricted from performing even sedentary work, as even sedentary jobs still have basic physical requirements like keyboarding and mousing. However, in determining that Ms. Chacko’s LTD benefits should be terminated, Sedgwick instructed its claims representative have a third TSA and to utilize only the limitations that had been set forth in a QME report, essentially instructing her to no longer consider the keyboarding and mousing restrictions that her treating physicians continued to include in their progress notes and work status reports. The court found that Sedgwick’s conduct resulted in a procedural irregularity that warranted skepticism of Sedgwick’s claim determination. The court noted that the restrictions and limitations provided in the first two TSAs, on which Ms. Chacko’s STD and initial LTD claims were approved, were consistent with those provided by her treating physician.

Third, the court addressed Sedgwick’s reliance on Dr. Grattan’s biased and flawed pure paper reviews. The court noted that there was no evidence that Sedgwick had cherry-picked which medical records to provide to Dr. Grattan and that performing only a paper review, without also performing an independent medical exam (“IME”), is not a procedural irregularity in itself, at least not if the reviewing physician was provided all the medical records for review. However, while Sedgwick’s reliance on a paper review without an IME was not a procedural irregularity in itself, the court considered the substantive adequacy of Dr. Grattan’s paper review in determining whether Sedgwick had abused its discretion. In this case, Dr. Grattan had a history of evidently rubber-stamping conclusions provided by Sedgwick and providing cursory conclusions which were not consistent with the related medical records.

Finally, the court discussed Sedgwick’s failure to properly consider the Social Security Administration’s (“SSA”) approval of Ms. Chacko’s claim for Social Security Disability Income (“SSDI”) benefits. The court noted that while ERISA plan administrators are not bound by the SSA’s determination (as the SSA has its own set of standards and ERISA plan administrators each have their own respective standards), Sedgwick’s conduct amounted to a procedural irregularity. Sedgwick had considered only the fact that the SSA had approved Ms. Chacko’s claim for SSDI benefits but did not make any effort to obtain her SSA file in order to evaluate why her SSDI claim was approved. The court noted that in this case, the Plan was in regular contact with the attorney representing Ms. Chacko in her SSDI claim and still made no effort to evaluate the SSA’s analysis of her claim. The court noted it has been recognized that a plan does not sufficiently “grapple” with an SSDI’s contrary conclusion where the plan “merely pays lip service to the existence of a contrary SSA disability determination” and includes “standardized language” explaining that the SSA and plan use different definitions of “disability” and that unlike the SSA, private plans are not required to give special deference to the opinions of the claimant’s treating physicians. See Hertz v. Hartford Life & Acc. Ins. Co., 991 F. Supp. 2d 1121, 1129, 1131, 1142 (D. Nev. 2014). This is exactly what the Plan did in Ms. Chacko’s case. Thus, the court found that the Plan’s failure to request Ms. Chacko’s SSA file, to engage in a meaningful review of the rationale underlying the SSA’s approval of her SSDI benefits claim, and to explain why the Plan was reaching a different conclusion constituted a procedural violation of ERISA’s regulations.

Ultimately, the court concluded that Sedgwick had abused its discretion in determining that Ms. Chacko was not entitled to ongoing LTD benefits. In providing this opinion, the court highlights some of the many gray areas of ERISA law and demonstrates that many elements of ERISA contain nuance and must be considered in the proper context of an individual matter. Chacko serves as a reminder that ERISA is a complicated, nuanced area of the law. If you are involved in an ERISA matter, the best thing you can do is enlist knowledgeable, experienced ERISA attorneys to utilize the expertise necessary to navigate such matters. The attorneys at McKennon Law Group PC are without rival when it comes to understanding and litigating ERISA law.