Oct 162013

As was set forth in our post of October 15, resolution of the critical “standard of review” issue is linked to the presence (or absence) of “magic” language in the plan — that is, language conferring upon the decision-maker discretion to determine benefit eligibility. If the “magic” language is present, then “arbitrary and capricious” review results; if not, then the review standard is “de novo.”

But even under circumstances where it is conceded that the plan contains language conferring discretionary authority, there are a handful of potential arguments for the court to pursue “de novo” review nonetheless.  One such argument, explored by the Second Circuit in Nichols v. Prudential Ins. Co. of Am., 406 F.3d 98 (2d Cir. 2005), comes into play when the benefit determination in focus did not come about as a result of an exercise of the decision-maker’s discretion (as where, for example, an ERISA appeal was denied by operation of law because the decision-maker never actually rendered a decision or because the decision came too late).  Another focuses on the fact that some jurisdictions have, by statute, rendered discretionary clauses unenforceable.  See, e.g., California Insurance Code 10110.6 (effective January 1, 2012).  Still another, highlighted in a recent District Court decision, is predicated on the common sense requirement that the entity responsible for the benefit determination and the entity vested with discretion must be one and the same.

In the case, discretionary authority was vested in First Unum Life Insurance Company (“First Unum”), but the individuals who actually made (and subsequently upheld) the adverse benefit determination were employees of Unum Group (a holding company of various subsidiaries, including First Unum). Deciding that the decision-makers were not agents of First Unum (because the “general service agreement” between First Unum and Unum Group defined Unum Group as an “independent contractor”), and that First Unum had not validly delegated its discretionary authority to Unum Group (because the power to delegate is not inherent, and no authority or procedure for doing so existed in the plan), the District Court held that “de novo” review was appropriate.

McDonnell v. First Unum Life Ins. Co., 2013 WL 3975941 (S.D.N.Y. Aug. 5, 2013)

Oct 152013

In the world of employee benefits law, the applicable standard of review is a frequently-disputed threshold issue, and for good reason. An employee claimant’s bid to overturn an adverse benefit determination stands a far better chance of succeeding under “de novo” review, wherein the District Court reviews the record anew, divorced from any presumption of correctness, and stripped of any notion of deference. Conversely, where the standard of review is “arbitrary and capricious,” and the District Court is thus tasked to determine if the benefit determination was “without reason, unsupported by substantial evidence or erroneous as a matter of law,” the employee claimant faces a more difficult challenge.

And upon what consideration or set of considerations does this preliminary (yet hugely important) issue hinge? On the presence or absence of certain “magic” language in the subject plan (i.e., language conferring upon the decision-maker discretion to determine benefit eligibility). And although most of the decisions that have come down in this area have focused on whether a particular sentence or phrase suffices to confer discretion, a recent District Court decision wrestled with a different issue.

In the case, the insurer asserted that the “magic” language is contained in both the plan and the summary plan description (SPD). As respects the language in the plan, however, the insurer faced a problem: nearly identical language had been deemed by the Second Circuit, some eight (8) years earlier, insufficient to confer discretionary authority. That meant that if the insurer were going to succeed in forcing “arbitrary and capricious” review, it would need to rely on the language in the SPD.

Citing to the Supreme Court’s 2011 decision in CIGNA Corp. v. Amara, the District Court first held that statements contained within an SPD do not automatically constitute plan terms. In order for an SPD to be made part of the plan, the District Court held, there must be an explicit provision to that effect. And while finding that the SPD in question did in fact contain the “magic” language, the District Court concluded that because SPD had not been explicitly incorporated into the plan, de novo review was appropriate.

Wenger v. Prudential Ins. Co. of Am., 2013 WL 5441760 (S.D.N.Y. Sept. 26, 2013)

Oct 142013

In 2010, the Supreme Court clarified in Hardt v. Reliance Standard Life Ins. Co. that an ERISA litigant need not be a “prevailing party” in order to recover attorney’s fees; rather, to be eligible for an award of attorney’s fees, a party need only demonstrate that it achieved “some degree of success on the merits.” This standard is not met, said the Court, when a party achieves only “trivial success on the merits or a purely procedural victory.” It is satisfied, however, when a “court can fairly call the outcome of the litigation some success on the merits without conducting a lengthy inquiry into the question whether a particular party’s success was substantial or occurred on a central issue.”

Flash forward to September 2013, when the Second Circuit evaluated a District Court’s handling of an ERISA fee claim, ultimately concluding that the District Court failed to apply Hardt correctly. The case centered on a dispute over coverage for medical expenses incurred by the wife of an insured employee, with the insurer contending that the employee and his wife should not have been covered, that the subject policy should be rescinded and/or reformed to reflect the lack of coverage, and that it should be allowed to recover in “restitution” the funds that it had previously disbursed to the employee’s wife’s medical providers.

In its only decision on the merits, the District Court dismissed the insurer’s restitution claim, while denying summary relief to either side on the other claims. Thereafter, the claims were settled, leaving only the dispute over attorney’s fees. The District Court, purporting to follow Hardt, denied the application for fees, deeming the dismissal of the restitution claim merely “procedural,” and deciding that everything else that resulted was derivative of the parties’ voluntary settlement (which, according to the District Court, cannot be used to underpin a fee claim for lack of a “judicial imprimatur needed to qualify as litigation success”). The Second Circuit, however, disagreed, calling the demise of the insurer’s restitution claim akin to a judgment on the merits, and also deeming the subsequent withdrawal of the remaining claims potentially a success in and of itself because, in the Second Circuit’s view, there exists a question of fact as to whether the withdrawal was precipitated by the District Court’s expressions of skeptism in relation to the insurer’s claims in general (which would bring it in-line with so-called “catalyst theory”).

Scarangella v. Group Health, Inc., 731 F.3d 146 (2d Cir. 2013)

Oct 112013

On September 27, Judge Mae A. D’Agostino (N.D.N.Y.) issued a decision in a case involving a rarely-covered subject: the propriety of a purported “offset.”  An offset, for those who may not know, is a payment received by a claimant, from a source other than the disability insurer, that the disability insurer is permitted (under the terms of the plan or policy) to deduct from the monthly benefit payment that it would otherwise be required to remit.  The most frequently encountered example is Social Security Disability Income (SSDI) benefits.

In the case, the plan authorized an offset for, among other things, Social Security disability benefits that the “employee or any third party receives on the employee’s behalf.”  The employee in question was receiving SSDI, and there was no disagreement that the amounts received constituted a valid offset.  Instead, the controversy arose in reference to the Social Security Administration’s payment of Dependent Social Security Disability (DSSD) benefits, which are payable when the recipient of SSDI benefits has one or more dependent children.  Contending that DSSD benefits constitute Social Security disability benefits “that a third party receives on the employee’s behalf,” the insurer claimed an offset.  The employee, however, disagreed.

Judge D’Agostino resolved the dispute in the employee’s favor, ruling that DSSD benefits are not benefits that a third party receives on the employee’s behalf, but rather benefits that a third party receives on his or her own behalf.  In other words, the court held that while nothing prohibits an insurer from providing that DSSD benefits constitute an offset, the plan in question simply failed to do so.

Brutvan v. CIGNA Life Ins. Co. of N.Y., 2013 WL 5439151 (N.D.N.Y. Sept. 27, 2013)