arbitrary and capricious

Many large companies offer employees “self-insured” or “self-funded” ERISA plans to provide disability insurance or health insurance benefits. However, these companies are not in the business of administering health or disability claims. This makes sense. Boeing doesn’t know how to evaluate a short term disability claim. Intel isn’t in the long term disability business. AT&T doesn’t know how to read medical billing codes. So, instead of trying to do this itself, most companies hire other companies to administer the disability or health insurance claims.

These “third-party” companies are either in the business of administering ERISA benefit plans (e.g. Sedgwick and Reed Group) or are already administering these types of claims because they offer medical or disability insurance themselves (e.g. Cigna and Aetna). In theory, a benefit of this structure is that the entity making the claims decision is not the same entity that has to pay the claim. There is no structural conflict of interest.

How do courts view this type of structure if a lawsuit is filed? In such a situation there was a denial of disability benefits or a medical claim was denied. If the ERISA Plan conferred discretionary authority to the claim administrator – and almost all do this – the court reviews the denial of benefits under the plan for an abuse of discretion. Firestone Tire & Rubber Co. v. Brunch, 489 U.S. 101, 115 (1989). Once the court determines that the insurance policy unambiguously grants discretion to the entity that denied the claim – here the third party administrator – the court must determine whether the administrator or fiduciary was operating under a conflict of interest. Metropolitan Life Ins. Co. (MetLife) v. Glenn, 554 U.S. 105 (2008) (“Often the entity that administers the plan, such as an employer or an insurance company, both determines whether an employee is eligible for benefits and pays benefits out of its own pocket. We here decide that this dual role creates a conflict of interest; that a reviewing court should consider that conflict as a factor in determining whether the plan administrator abused its discretion in denying benefits; and that the significance of the factor will depend upon the circumstances of the particular case.”); Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 965 (9th Cir. 2006) (“Abuse of discretion review applies to a discretion-granting plan even if the administrator has a conflict of interest. But Firestone also makes clear that the existence of a conflict of interest is relevant to how a court conducts abuse of discretion review.”).

On May 11, 2017, the US Court of Appeals for the Ninth Circuit issued a decision in Orzechowski v. Boeing Co. Non-Union LTD Plan, et al., Case No. 14-55919 (9th Circ. May 11, 2017) upholding the application of the California law which invalidates “discretionary clauses” in Long Term Disability (LTD) plans and other life and disability contracts of insurance.

Prior to 2012, insurers in California (and many other states) were allowed to place “discretionary clauses” into their insurance policies. These clauses, while seemingly innocuous, actually made it significantly harder for insureds to challenge wrongful denials of insurance benefits in court. These clauses forced Federal Courts to review denials of insurance benefits under an “abuse of discretion” standard. In order to prevail under this standard, an insured not only had to show that they were entitled to the benefits under the contract, but they also had to show that the insurer’s decision was “arbitrary and capricious.” The effect of this was that Court’s were routinely deferring to the “discretion” of the insurer thereby upholding their denial. This created is a much more difficult standard of proof for insureds to meet than in an ordinary civil lawsuit, where one need only prove their case by a “preponderance” of the evidence, and where Courts do not give any special weight to the evidence presented by the other side. The result of the so-called discretionary clauses was that many insureds lost their lawsuits for wrongfully denied benefits even when, technically, they were entitled to benefits under the term of the contract. Court’s would simply hold they could not find evidence the insurer “abused its discretion” or acted unreasonably enough so as to justify overturning the insurer’s denial of benefits.

In 2012, the California legislature passed California Insurance Code §10110.6, which provides that all discretionary clauses in California insurance contracts are null and void, if the insurance policy or plan “renewed” as of January 1, 2012. As a result, Courts will now look at the evidence anew, or “de novo” to make a determination of whether the insured is entitled to benefits, instead of simply deferring to the insurance company’s conclusions. This is a much easier burden for insureds to meet than the older “abuse of discretion” standard.

Articles Tagged with arbitrary and capricious

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