Under insurance policies governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), when an insurer denies a person’s claim for life insurance benefits, short-term-disability benefits or long-term-disability benefits, the beneficiary must request that the insurance company review the denial or termination if they intend to sue the insurer to obtain their benefits.  Courts refer to this review as an “administrative appeal” and the obligation to pursue that appeal as the duty to exhaust administrative remedies.  Courts have universally concluded that they “have the authority to enforce the exhaustion requirement in suits under ERISA, and that as a matter of sound policy they should usually do so.”  Amato v. Bernard, 618 F.2d 559, 568 (9th Cir. 1980).  The administrative appeals process is very important.  Not only must a beneficiary pursue their administrative remedies in order to obtain the right to sue in court, but a beneficiary’s actions during the administrative appeals process can have serious ramifications for any resulting litigation.

When a beneficiary appeals an insurer’s initial decision, the documents submitted to the insurer become the “administrative record.”  If an insured fails to submit a piece of evidence to the insurer, a Court may refuse to consider the evidence in any subsequent litigation.  During litigation, a court usually only examines the administrative record.  See, e.g., Blaj v. Unum Life Ins. Co. of Am., 2014 WL 2735182, at *2 (N.D. Cal. June 16, 2014) (citing Opeta v. Northwest Airlines Pension Plan, 484 F.3d 1211, 1217 (9th Cir. 2007), and stating that “a district court should determine whether the plaintiff is entitled to benefits based on the evidence in the administrative record, and evidence outside the administrative record may only be considered in ‘certain limited circumstances’”).  Given the importance of building a strong administrative record, beneficiaries potentially imperil their claim by performing their own appeal.  However, assuming an insured sends the insurer all relevant records, then a skilled attorney will likely possess most of the tools required to build their argument and win a case in court.

Given that a court rarely examines evidence outside the administrative record, a second question naturally arises:  Can a beneficiary present arguments to a judge that they did not raise when pursuing their administrative appeal?  The idea that a beneficiary cannot present an argument for the first-time during litigation is referred to as “issue exhaustion.”  Thankfully, courts nearly universally reject insurance companies’ attempts to invoke this doctrine.

In Vaught v. Scottsdale Healthcare Corp. Health Plan, 546 F.3d 620, 630 (9th Cir. 2008), the Ninth Circuit rejected an insurer’s attempt to dismiss a claim because of an alleged failure to satisfy this doctrine.  The Ninth Circuit explained that the Supreme Court has instructed lower courts that “issue exhaustion is typically a creature of statute or agency regulation.”  Id.  The Ninth Circuit subsequently reasoned that because, “No ERISA statute precludes courts from hearing objections not previously raised to the Plan, nor does any ERISA statute or regulation require claimants to identify all issues they wish to have considered on appeal,” ERISA does not require issue exhaustion.  Id.

In Wolf v. National Shopmen Pension Fund, 728 F.2d 182, 186 (3d Cir. 1984), the Third Circuit reached the same conclusion.  ERISA does not compel courts to enforce the doctrine of issue exhaustion.  The Third Circuit explained that it had found no caselaw supporting the doctrine:

Section 502(a) of ERISA does not require either issue or theory exhaustion; it requires only claim exhaustion. 29 U.S.C. § 1132(a). The Pension Fund cites no case, nor are we aware of any case which holds that a district court cannot decide a claim relying on a theory different from that presented to the Trustees of a Pension Fund. All of the cases with which we are familiar concern themselves only with whether the internal union remedies have been exhausted before finding federal jurisdiction appropriate.

Id. (emphasis in original).

These rulings declining to impose an issue exhaustion requirement protect ERISA plan participants and their beneficiaries.  McKennon Law Group PC receives many calls from people who conducted their own appeals after an insured denied their benefits.  If, in fact, issue exhaustion applied, then we likely could not help these people.  A lay person does not know what the law requires of an insurer or what to argue on appeal.  Many appeal letters drafted by attorneys, such as those at this firm, contain pages of legal argument and citations to cases supporting the claim.  If issue exhaustion applied, a beneficiary would be required to seek legal counsel during the appeals process.  One honest misstep would result in the claim being unsalvageable.

Of note, the Ninth Circuit did state that an insurer could, in theory, include an issue exhaustion requirement in a policy.  See Vaught, 546 F.3d at 629-33.  An insurance policy is just a specialized form of contract.  The plain language of the contract dictates the relationship between the parties.  However, the Ninth Circuit concluded that language stating that a beneficiary must “clearly explain . . . the reason why you think the Claims Administrator should reconsider your claim” lacked sufficient specificity so as to impose a contractual issue exhaustion requirement.  Id. at 629, 632.  The Vaught court’s opinion also implies that any such contractual requirement would need to be very explicit.  See id.

That courts do protect ERISA plan participants and their beneficiaries in this instance does not mean that it is wise to handle appeals on their own.  There are many pitfalls and landmines to avoid and hiring experienced ERISA appeals attorneys like McKennon Law Group PC may make the difference between getting your long-term disability claim paid or not.