The Western Kentucky District Court recently reviewed a long-term disability (“LTD”) claim denial de novo rather than using an abuse of discretion standard, despite the policy containing language authorizing the plan administrator to use discretion in interpreting the plan and making claims decisions. In Smith v. Reliance Std. Ins. Co., 2024 WL 647395 (W.D. Ky. 2024), the court entered judgment in favor of the plaintiff and granted her leave to request attorney’s fees after determining under a de novo standard of review that her inherently subjective pain symptoms rendered her disabled under the terms of the policy.

When a disability insurance policy contains language permitting the plan administrator to use discretion in interpreting the plan’s terms and deciding whether to approve or deny a claim for benefits, typically a court will determine the outcome of the case by deciding whether the administrator abused its discretion in denying a claim. Alternatively, where a policy does not grant discretion to the administrator, the court will review the decision de novo, which means the court reviews the evidence and decides whether the plaintiff is disabled under the policy without giving any deference to the plan administrator’s denial. In Smith, a third party reviewed and denied the plaintiff’s claim. The court found that despite the policy language granting the plan administrator discretion, the plan administrator had not actually exercised any discretion, but instead had contracted out to the third party, Matrix Absence Management, Inc., to interpret the plan and deny the plaintiff’s LTD claim and the third party “exercised ultimate decision-making responsibility for the policy determination.” The court cannot determine whether the plan administrator abused its discretion if the plan administrator did not exercise discretion. Therefore, the court held that it could review the LTD claims determination de novo. The court explained that:

Reliance Standard responds to [to the argument that it did in fact exercise discretion in denying the claim] by pointing out that the April 26, 2021 letter is written to Smith from Reliance Standard. [] Although that letter is on Reliance Standard letterhead, it is signed by Norden, and it does not change the fact that Norden was employed by Matrix and exercised ultimate decision-making responsibility for the policy determination. []. This alone is sufficient to show that Reliance Standard—although the policy clearly vested it with discretionary authority—did not actually exercise that discretionary authority itself. As a result, the Court must review the claims determination de novo. See, e.g., Davidson v. Liberty Mut. De novo. Co., 998 F. Supp. 1, 9 (D. Me. 1998) (applying de novo review where “[No portion] of the LTD plan … expressly permits delegation of the duties of the plan administrator” and “the Court cannot assume that the LTD plan permitted delegation of the duties of the plan administrator[.]”); Belheimer v. Fed. Express Corp. Long Term Disability Plan, 2012 U.S. Dist. LEXIS 168882, at *20 (D.S.C. De novo. 28, 2012) (“[A]s Federal Express delegated its final decision-making authority to Aetna, and the LTD Plan did not contemplate or authorize such a delegation, this Court will review the decision to deny Plaintiff’s long-term disability benefits claim de novo.”).

Id. at *4.

For a plaintiff, overcoming an abuse of discretion standard is usually more difficult than the court determining as a first impression whether the evidence favors the plaintiff’s disability claim under the de novo standard of review. Thus, for the court in Smith to review the LTD denial de novo rather than using an abuse of discretion standard could well have been the difference between receiving LTD benefits and the court upholding the denial. The court’s decision to review the LTD denial de novo was therefore a significant victory for the plaintiff.

Aside from having her LTD benefits reinstated, the court’s decision also meant that the plaintiff had achieved success on the merits. Had the court decided the case using an abuse of discretion standard, the plaintiff may not have succeeded on the merits and therefore would not have been given leave to request attorney’s fees. Because the court overturned the denial of LTD benefits and approved LTD claim, it gave the plaintiff the ability to recover significant attorney’s fees possibly based on the distinction between the plan administrator making a claims decision itself on one hand or contracting out with a third party on the other. This nuance illustrates the need for knowledgeable, experienced counsel when challenging an insurance company’s claim denial. Finding experienced ERISA disability insurance attorneys to handle your denied disability insurance claim is critical. The attorneys at McKennon Law Group PC have been immensely successful handling matters like Smith involving complex nuance.