- Requirement for Impartial Disability Claim Personnel: Disability claim insurers and administrators must now “ensure the independence and impartiality of the persons involved in making the decision” and that “decisions regarding hiring, compensation, termination, promotion, or other similar matters with respect to any individual (such as a claims adjudicator or medical or vocational expert) must not be made based upon the likelihood that the individual will support the denial of benefits.” Courts have generally recognized that evidence of bias on the part of disability claim managers and medical reviewers – such as bonuses based on denied claims, funneling medical reviews to physicians with a known bias against finding disability, physicians deriving substantial income from their medical reviews, etc. – is good reason to review a claim denial decision with increased skepticism and searching stringency. EBSA’s explicit adoption of this requirement seems likely to improve the chances that (i) plaintiff’s attorneys will have greater access, during discovery, to such matters as compensation of disability claim personnel, contracts and retainer/payment statistics for external medical/vocational examiners and consultants; and (ii) courts will be more inclined to view evidence of such financial incentives as a significant indicator of an unreasonable and improper decision-making process.
- More Specific Reasoning in Disability Claim Denial and Appeal Denial Letters: In denying a disability claim (or appeal), an insurer must now specifically explain in its denial letter its disagreement with (i) opinions of the claimant’s medical and vocational experts, (ii) the views of its own experts (whether or not relied upon in the claim denial), and (iii) the disability determination of the Social Security Administration. In addition, the denial letter must discuss the disability plan’s applicable internal guidelines/criteria, or explicitly state that such guidelines/criteria do not exist. Courts have – on a case by case basis – faulted disability claim denial explanations that give short shrift to certain pieces of information or do not discuss that information at all. By identifying specific categories of information and requiring a written explanation with regard to each, the new regulations reinforce and give teeth to this case law. The new regulations aggregate the separate protections in the case law and create an affirmative duty on the part of disability claim examiners to explicitly address all of these types of information in every case.
- Opportunity for Claimant Response when Insurer/Administrator Introduces New Evidence or New Reason for Claim Denial at the Appeal Stage: This is another area where EBSA has codified and strengthened protections recognized by the courts. Claimants have long argued that because an insurer/administrator effectively functions as a judge when it reviews a claim denial, it should only be able to affirm or reverse the claim denial decision as originally formulated. It should not be able to affirm the decision by jettisoning the original basis for the denial and adopting a new one. Nor should it be able to bolster its claim denial by introducing new evidence at the appeal stage. One example of the former scenario is an insurance company that first denies a disability claim because it arises from a pre-existing condition, but then denies the claim at the appeal stage because the claimant failed to provide sufficient evidence of disability. An example of the second scenario is a disability insurance company that first denies a claim based on a consulting physician’s opinion that the claimant’s lumbar disc herniation is not so severe as to preclude sedentary work, and then at the appeal stage introduces evidence that the claimant’s job would not require continuous sitting, but could be performed by interspersing period of sitting with intervals of standing and walking. Claimants have characterized each of these scenarios as an unfair bait-and-switch that deprives them of an opportunity to confront and respond to new material not previously recited or relied upon by the insurer/claim administrator. While some courts have viewed a claim administrator’s failure to supply new material to the claimant before its final decision as evidence of bias or an abuse of discretion, others have done so only if the claimant specifically requested the new material prior to the final decision, and others have rejected any duty to provide the new material at all (on the ground that this would create an endless cycle where the claimant is entitled to review and reply to each new substantive reconsideration by the claim administrator). The new regulations adopt the first position, imposing a duty on the insurer/claim administrator to “provide the claimant … with any new or additional evidence considered, relied upon, or generated … before the plan can issue an adverse benefit determination on review” and to “give the claimant a reasonable opportunity to respond prior to that date.” It provides identical rights with regard to an adverse disability benefit determination on review that is based on a “new or additional rationale.” The new regulations thus impose an affirmative duty on the insurer/claim administrator to identify whether it has generated any new evidence or is intending to rely on a new rationale, and if so, to notify the disability claimant and allow a reasonable time for response before a final decision is reached on the appeal.
- A Violation of the Disability Claim Requirements Triggers Deemed Exhaustion and a Deemed Denial: Prior to 2002, a violation of ERISA’s procedural regulations resulted in a “deemed denial.” The majority of courts concluded that a deemed denial exhausted the appeal procedure, permitting a lawsuit, and resulted in non-deferential de novo review – even if the plan conferred discretionary authority. Because a deemed denial resulted from the failure to exercise decision-making discretion, it was reasoned, there was no decision to which deference could be given. After 2002, as a result of EBSA’s 2000 revisions to ERISA’s procedural regulations, a violation of the procedural requirements was amended to result in a “deemed exhaustion” (rather than a “deemed denial”) of the claim. A number of courts then determined that deemed exhaustion permitted access to the courts, but did not necessarily result in de novo review – at least where the disability claim administrator nonetheless rendered a disability decision at some point before (or shortly after) the lawsuit was commenced, and/or where the administrator’s claim determination process was determined to be in “substantial compliance” with ERISA’s procedural requirements. EBSA’s new 2018 procedural requirements clarify that a procedural violation results in both deemed exhaustion and a deemed denial and expressly underscores that this results in de novo review: “If a claimant chooses to pursue remedies under section 502(a) of the Act [i.e., a lawsuit]…, the claim or appeal is deemed denied on review without the exercise of discretion by an appropriate fiduciary.” As EBSA explained when it proposed this new language, “The Department’s intentions in including this provision in the proposal are to clarify that the procedural minimums of the Section 503 Regulation are essential to procedural fairness and that a decision made in the absence of the mandated procedural protections should not be entitled to any judicial deference.” The new regulations include a “minor errors exception” if the disability claim administrator’s procedural violation was “(i) de minimis; (ii) nonprejudicial; (iii) attributable to good cause or matters beyond the plan’s control; (iv) in the context of an ongoing good-faith exchange of information; and (v) not reflective of a pattern or practice of non-compliance.” A disability claimant faced with a procedural violation may demand an explanation for any non-compliance. The disability insurance company or claim administrator must provide a response within 10 days setting forth any basis on which it believes it is subject to the “minor errors exception.” EBSA has thus established a strict enforcement approach to violations of the disability claim procedures it has laid out. Failure to abide by these rules automatically constitutes a “deemed denial” and exhausts the disability claimant’s obligation to participate in any further claim or appeal procedures. The disability claimant can immediately file a lawsuit. Most important, a violation of the procedural rules triggers non-deferential de novo review, and in order to re-establish entitlement to deferential review, the insurer/claim administrator bears the burden of proving the five elements of the “minor errors exception.” Those elements are both more concrete and more stringent than the amorphous “substantial compliance” formulation that was developing in the courts.
- Duty to Give Notice of the Statute of Limitations Calculated by the Insurer/Administrator: Another significant protection instituted in the new disability claim regulations is a requirement that an insurer/claim administrator must – in its appeal denial letter – describe any applicable contractual limitations period that applies to the claimant’s right to file a lawsuit and to specify the calendar date on which that right will expire. This will eliminate needless confusion that has developed over when to file a lawsuit. At one time, the prevailing rule was that the applicable limitations period was the time period spelled out in the disability plan or, in the absence of a plan provision, the applicable state statute of limitations (typically the one governing contract actions). Regardless of plan language, most courts counted this limitations period from the date of the final appeal denial because the mandatory exhaustion requirement precluded the commencement of a lawsuit until after a final denial decision. In practice, most disability claimants had between 2 and 6 years to find a lawyer and file a lawsuit after the final appeal decision of the insurer/claim administrator. Confusion arose as insurers sought strict application of their disability plan provisions, which generally counted the limitations period from the date when “proof of claim is due” – rather than the date of the final appeal denial decision. “Proof of Claim” is often defined principally (or exclusively) with regard to the initial application for disability benefits – an artifact of mandatory state insurance law provisions enacted at a time when most disability insurance policies were individual, there was no mandated appeal process, and a claimant could file a lawsuit almost immediately after Proof of Claim was filed (if the insurance company denied the claim or was dragging its feet about making a determination). Indeed, most disability plans still include accompanying mandatory language to the effect that a claimant may bring a lawsuit “60 days after the date Proof of Claim is given” – even though the right to commence a lawsuit in such a short period of time has been entirely eviscerated by ERISA’s court-imposed appeal exhaustion procedures (which, in the case of an initial claim denial, can take as much as a year or more to complete after Proof of Claim is submitted). Counting the time to file a lawsuit from the Proof of Claim also makes no sense where the disability determination being challenged isn’t the denial of the initial claim. When individual disability policies were first marketed and sold, it was not uncommon for disability determinations to be made at the outset of the claim and to never again be revisited. But that is not the case in modern employer-sponsored long-term disability plans, where the decision being challenged is frequently the later termination of a claim that was initially approved. For example, a claim might be terminated at the time when the claim transitions from “own occupation” to “any occupation” benefits (typically after 24 to 60 months), or a claim based on mixed mental and physical conditions might be terminated when it reaches the maximum period for consideration of the mental aspects of the claimant’s condition (typically, 12 to 36 months) and must thereafter be based solely on the physical condition. In such “later termination” cases, the time to file a lawsuit (if counted from the initial Proof of Claim) may be running while the claimant is approved for and receiving benefits! Indeed, the time to file a lawsuit may expire before the disability claim is denied, while the claim denial is being appealed, or within a very short period after the final appeal decision is rendered. Courts have started to come up with workarounds in these circumstances, such as: prescribing an alternate “reasonable” time to file a lawsuit; changing the start date from the initial proof of claim to the date of the last, pre-termination request for supplemental proof of claim; changing the start date to the date of the denial decision, or the date of the final appeal decision; or substituting a longer state law statute of limitations period where the contractual limitations period has prematurely expired. It can be extremely difficult, even for a lawyer well-versed in ERISA law, to predict the limitations deadline a court may adopt in any given case. In light of this murkiness, EBSA’s rule requiring the insurer/administrator to give notice of its calculation of the final deadline date is a well-needed protection. It puts the insurer/administrator on record with a deadline that it will find difficult (if not impossible) to later revoke or disavow. Thus, the claimant will be notified of a clear “safe” period within which a lawsuit can be started. Since many disability claimants manage the appeal process on their own and may be unaware that their right to file a lawsuit may be time-limited, receiving notification of a firm calendar date by which they need to file a lawsuit should propel them to seek legal representation in a timely manner.
The New Procedures Emphasize the Fiduciary Responsibility of Disability Insurers and Claim Administrators
One theme of these new protections is that they put responsibility on the claim administrator to affirmatively identify and address potential areas of unfairness. This is entirely appropriate, given the fiduciary hat worn by an insurer or administrator when determining a claim. If the claim administrator is to be given the litigation advantage of a fiduciary, i.e., deferential review, it ought to earn that deference by “higher-than-marketplace quality standards” (to borrow the words of the Supreme Court in MetLife v. Glenn) when it administers a disability claim. Indeed, such protections also reduce the substantial power and knowledge imbalance that exists between insurance company and disability claimant – particularly when the latter chooses to file a disability claim or submit an appeal without the assistance of a lawyer. By requiring the insurer/claim administrator to specifically address certain relevant topics, to identify new evidence or a new rationale (and inviting the claimant to respond), and to provide a calendar date to file a lawsuit, the new disability claim regulations thus mandate greater transparency, fairness, and disclosure to the claimant as befits the insurer-claim administrator’s role as a claim fiduciary.
EBSA’s strengthening of the deemed denial rule may serve to super-power these transparency, fairness, and disclosure protections. Not only will these protections be important on their own, as specific indicators of whether a full-and-fair review was provided, but additionally – through the deemed denial rule – any violation of these protections now will permit instantaneous access to a lawsuit and non-deferential de novo review. Under de novo review, a claimant is on an equal footing with the claim administrator and must merely demonstrate disability and entitlement to disability benefits by a preponderance of the evidence. Access to de novo review – the default standard of review in most civil litigation – is an important and appropriate remedy for violations of ERISA’s full-and-fair review regulations, given the fiduciary hat worn by an insurer or administrator when determining a claim. In the absence of such violations, a claim fiduciary with discretionary authority has a substantial legal advantage: the arbitrary-and-capricious standard of review (which compels a court to defer to the fiduciary’s claim determination unless that determination is without reason, unsupported by substantial evidence or erroneous as a matter of law).
Deemed Denial, De Novo Review, and Racing to the Courthouse?
One critical question will be whether courts will allow claimants to reserve their rights with regard to a procedural or disclosure violation, or will, in effect, endorse racing to the courthouse. In one of the few cases that have addressed the new regulations, Dragus v. Reliance Std. Life Ins. Co., 882 F.3d 667, 672 (7th Cir. 2018), the 7th Circuit Court of Appeals held that by pursuing an administrative appeal through to its conclusion, a claimant effectively waived any argument that he was entitled to de novo review as a consequence of the insurer’s failure to render a decision within the deadline specified by the disability claim regulations. The Court held that to use the “deemed denial” protection (and obtain de novo review), the claimant should have immediately abandoned the appeal and started a lawsuit. This interpretation of the regulations is likely to encourage claimants to run to court whenever a violation occurs. The significant advantages of obtaining de novo review by a court are likely to far outweigh the advantages of proceeding with an internal appeal with an insurance company.
Consequently, when a violation of the disability claim regulations occurs, it would be prudent for the claimant (or the claimant’s attorney) to request the “minor errors exception” explanation and to promptly decide whether immediate resort to a lawsuit is appropriate and beneficial. There is little downside to opting for a lawsuit because if a court rejects plaintiff’s entitlement to “deemed exhaustion” and “deemed denial,” the new regulations require the disability claim administrator to accept the claim “as re-filed on appeal upon the plan’s receipt of the decision of the court” and, “[w]ithin a reasonable time after the receipt of the decision, the plan shall provide the claimant with notice of the resubmission.” The Dragus Court did not state whether the claimant attempted to reserve his rights, so it is unclear whether such a reservation of rights would have made a difference. So, if the claimant opts for proceeding with the internal appeal (rather than litigation), the claimant (or claimant’s attorney) should specifically reserve the claimant’s rights with regard to any violation of the disability claim regulations, in the hope that this might be sufficient to still obtain non-deferential de novo review. Courts may also wish to reconsider the wisdom of the Dragus approach, which would seem to (i) require legal representation for a claimant to fully understand the choice that a violation presents, and (ii) encourage races to the courthouse. Neither of these outcomes is consistent with the purposes of ERISA.
EBSA’s new disability claim regulations provide enhanced procedural and disclosure protections, effective (since April 1, 2018) for all claims filed on or after January 1, 2018. These protections should make the claim and appeal procedure fairer and more transparent to the claimant. Nevertheless, the ERISA appeal process remains a critical time for a claimant to build a strong disability claim – both for purposes of obtaining a reversal by the claim administrator at the appeal stage or winning reinstatement by a judge at the lawsuit stage. A lawyer’s assistance throughout the disability claim process may avoid a denial in the first place, and, in the event of denial, will maximize the possibility for success in any subsequent internal appeal or litigation. See “An Experienced ERISA Insurance Attorney Can Help Protect Your Life, Health Insurance and Disability Benefits.” Because of EBSA’s enhanced disability claim protections, a lawyer may now also be able to identify violations that could justify a deemed denial, abandonment of the internal appeal procedure, and initiation of a lawsuit. If so, such a lawsuit may have a crucial advantage – non-deferential de novo review by the court – that may otherwise be lost if the claimant opts to complete the internal appeal process.
Chris Wieber is a New York ERISA attorney with nearly 30 years’ experience in short- and long-term disability claims.