The California legislature enacted the Parity Act in 1999 after finding that “[m]ost private health insurance policies provide coverage for mental illness at levels far below coverage for other physical illnesses.”  1999 Cal. Legis. Serv. ch. 534 (A.B.88), § 1 (West).  The legislature further found that coverage limitations resulted in inadequate treatment of mental illnesses, causing “relapse and untold suffering” for people with treatable mental illnesses, as well as increases in homelessness, increases in crime and significant demands on the state budget.  Id.  Accordingly, plans that come within the scope of the Act – including the ERISA-governed plan established by Harlick’s employer – must cover all “medically necessary” treatment for nine listed mental illnesses (including anorexia nervosa), but can apply the same financial limits – such as yearly deductibles and lifetime benefits – that are applied to coverage for physical illnesses.

Harlick sued Blue Shield, but after the parties stipulated that Blue Shield’s decision would be reviewed under the abuse of discretion standard of review, the district court granted Blue Shield’s motion for summary judgment.

In reviewing Harlick’s case, the Ninth Circuit evaluated whether Blue Shield abused its discretion in denying Harlick’s request for coverage for her treatment at Castlewood.  In ERISA cases, if there is a conflict of interest (i.e., same entity pays benefits and makes the coverage decision), than the administrator’s review and claim decision is “tempered by skepticism,” even if it is reviewed under the abuse of discretion standard.  Here, while the Court did not find that Blue Shield abused its discretion in denying Harlick’s claim, it did find that Blue Shield was responsible for Harlick’s residential care, based upon the Parity Act.  The Ninth Circuit stated:

Harlick’s Plan does not itself require that Blue Shield pay for residential care at Castlewood for her anorexia nervosa.  However, California’s Mental Health Parity Act provides that Blue Shield “shall provide coverage for the diagnosis and medically necessary treatment” of “severe mental illness” including anorexia nervosa.  Blue Shield is foreclosed from asserting that Harlick’s residential care at Castlewood was not medically necessary.  We therefore conclude that Blue Shield is obligated under the Parity Act to pay for Harlick’s residential care at Castlewood, subject to the same financial terms and conditions it imposes on coverage for physical illness.

The Court then turned to the question of whether Harlick’s treatment was medically necessary.  Blue Shield did not dispute that treatment at Castlewood was medically necessary until supplemental briefing filed after oral argument.  Blue Shield argued that it should be allowed to reopen its administrative process in order to determine whether Harlick's residential care was medically necessary.  The Court explained an ERISA administrator’s obligations:

ERISA and its implementing regulations are undermined 'where plan administrators have available sufficient information to assert a basis for denial of benefits, but choose to hold that basis in reserve rather than communicate it to the beneficiary.'  Mitchell v. CB Richard Ellis Long Term Disability Plan, 611 F.3d 1192, 1199 n.2 (9th Cir. 2010) (quoting Glista v. Unum Life Ins. Co. of Am., 378 F.3d 113, 129 (1st Cir. 2004)). Claimants should not be 'sandbagged by a rationale the plan administrator adduces only after the suit has commenced.'  Mitchell, 611 F.3d at 1199 n.2 (quoting Jebian v. Hewlett-Packard Co. Employee Benefits Org. Income Prot. Plan, 349 F.3d 1098, 1104 (9th Cir. 2003)) (some internal quotation marks omitted).  Just as claimants should present all of their arguments for granting the claim to the insurer during the administrative process, an insurer should tell the claimant all of its reasons for denying the claim.  Cf Diaz v. United Agric. Employee Welfare Benefit Plan & Trust, 50 F.3d 1478, 1483 (9th Cir. 1995).

During the administrative process, Blue Shield never said that it was denying the claim because treatment at Castlewood was not medically necessary.

The Court therefore concluded that by not including as a reason for denial of the claim that the treatment was not medically necessary, Blue Shield waived this reason to deny the claim:

Blue Shield has discretion to determine whether treatment is medically necessary during the administrative review process.  But Blue Shield had to tell Harlick the "specific reasons for the denial" - not just one reason, if there was more than one - and provide a "full and fair review" of the denial. 29 U.S.C. § 1133 (emphasis added). Blue Shield told both Harlick and her mother, as well as the DMHC, that medical necessity was not the reason for its denial of Harlick's claim. It cannot now bring out a reason that it has "held in reserve" and commence a new round of review.  See Mitchell, 611 F.3d at 1199 n.2.

Thus, even if it is expressly excluded from a plan, a California insurer is now obligated to ensure that coverage for certain medically necessary treatment for mental illness is on par with the coverage provided for necessary treatment for physical illnesses.  This ruling will thus have significant application to coverage for mental illnesses, especially autism.

From 2000 to 2008, Galloway worked as a machinist for Turbine Engine Components Technologies Corporation (“TECT”).  On January 1, 2002, Lincoln National issued a group life insurance policy to TECT and on October 14, 2004, Galloway, a TECT employee at the time, enrolled in the policy.  The policy contains a provision ensuring continued coverage, without payment of premiums, if a participant becomes totally disabled.

In January 2008, Galloway stopped working at TECT due to Achilles tendonitis.  In July 2008, Galloway requested that Lincoln National grant him a waiver from paying premiums on his life insurance policy due to his total disability.  

After litigation ensued, the court granted the Estate’s motion to supplement the administrative record with the declaration of Dr. Robert T. Fraser, Ph.D., who was the Estate’s vocational assessment expert.  In doing so, the court held that the Fraser declaration evidenced Lincoln National’s failure to conduct a proper vocational assessment of Galloway’s self-reported limitations.  The court held that this failure prevented the full development of the administrative record, relying on Abatie v. Alta Health & Life Ins. Co., 458 F.3d 955, 973 (9th Cir. 2006).

The court decided to remand the matter back to Lincoln National so that the parties could conduct a “meaningful dialogue” about Galloway’s self-reported symptoms.  Lincoln National once again conducted a cursory review of Galloway’s claim – primarily limited to asking an independent expert to review reports from his podiatrist – but made no attempt to secure additional information regarding Galloway’s reported restrictions and limitations.  The limited nature of Lincoln National’s investigation did not prevent it from denying Galloway’s waiver of premium claim again after remand. 

The court reviewed Lincoln National’s decision under the abuse of discretion standard of review and ruled that Lincoln National abused its discretion because it failed to conduct an adequate investigation into the basis for Galloway’s request for a premium waiver in large part because it failed to contact Galloway’s treating physician.  Specifically, the court ruled:

Here, the legal question before the court is whether Lincoln National abused its discretion in denying Mr. Galloway a waiver of premiums.  This determination depends on whether Lincoln National requested the needed information and offered a rational reason for its denial of Mr. Galloway’s claim.  See Booton v. Lockheed Med. Benefit Plan, 110 F.3d 1461, 1463 (9th Cir. 1997).  If Lincoln National meets this standard its decision to deny benefits would be given substantial deference.  Id.  After a review of the record before and after remand, the court finds that Lincoln National failed to follow-up with Mr. Galloway, or any medical expert, regarding the limitations Mr. Galloway listed in his self-assessment that, if true, rendered him completely disabled during the elimination period.

Thus, Lincoln National’s denial of benefits was not based on a full and fair review of the record as required by ERISA and Ninth Circuit authority.  See id.  (“Lacking necessary—and easily obtainable—information, [the plan administrator] made its decision blindfolded.”); see also Saffon v. Wells Fargo & Co. Long Term Disability Plan, 522 F.3d 863, 870-71 (9th Cir. 2008) (the plan administrator must give a “fair chance” to the beneficiary to present evidence to support her claim); see also Kunin v. Benefit Trust Life Ins. Co., 910 F.2d 534, 538 (9th Cir. 1990) (holding that to deny the claim without explanation and without obtaining relevant information is an abuse of discretion).  As it turned out, the opportunity for Lincoln National to engage in a meaningful dialogue with Mr. Galloway, before or after it made the initial denial decision, was cut short by the death of Mr. Galloway only a month later.

On remand, Lincoln National was given a second opportunity to attempt a full and fair review of Mr. Galloway’s claimed restrictions.  The evidence actually garnered during remand, however, only further exemplified why a meaningful dialogue is required in the first place.  On remand, the information provided by the treating physicians supported the claimed restrictions in Mr. Galloway’s self-assessment.  These restrictions should have formed the basis of Lincoln National’s original review but, due to its failure to consider fully the claims made by Mr. Galloway before denying his claim, it never contacted his treating physicians.

Lincoln National’s decision to deny Mr. Galloway’s claim without obtaining all the required information and without engaging in a meaningful dialogue with him was an abuse of discretion.  Moreover, had it engaged in any dialogue with Mr. Galloway, Lincoln National would have learned that two of his treating physicians believed him to be unable to perform any work, including sedentary work.  Based on the record before the court, and on its finding that Lincoln National abused its discretion in denying Mr. Galloway the requested waiver of premiums for his life insurance policy, the court orders Lincoln National to pay life insurance benefits to the Estate of Mr. Galloway.  (Emphasis added.)

Thus, because Lincoln National failed to contact Galloway’s treating physicians and otherwise failed to properly gather medical information related to Galloway’s claim, he was denied a full-and-fair review owed to all ERISA claimants.  The court determined that Lincoln National’s failure to conduct an adequate investigation and failure to engage in a “meaningful dialogue” with Galloway regarding the claim resulted in an abuse of its discretion, and order Lincoln National to pay the full death benefits due under the policy.

If you believe you have an individual or ERISA-governed life insurance, health insurance or disability insurance policy issued by Lincoln National, or any other insurer, for which you have failed to properly receive benefits, contact McKennon Law Group PC for a free consultation.

Samuel Salomaa was an employee of the American Honda Motor Company, Inc. for more than twenty years.  His supervisor described him as “the best employee to have worked for me” and Salomaa never called in sick, never left work early and never came in late.  Unfortunately, in October 2003 Salomaa developed what he thought was the stomach flu.  However, this “flu” was followed by grossly excessive fatigue, headaches, insomnia and excessive sensitivity to stimuli.

Because he was no longer able to perform his job duties, Salomaa filed a claim for disability benefits with Life Insurance Company of North America, which is a wholly owned subsidiary of CIGNA.  Salomaa made his claim though the ERISA-governed disability insurance plan offered by his employer.  However, his claim for benefits was denied after CIGNA concluded that because his “thyroid, calcium, albumin, serum electrolytes, and CBC results were normal,” his medical records contained “no positive objective physical findings” supporting disability. 

With their decision, CIGNA ignored the explanation by Salomaa’s physicians that for those suffering from CFS “laboratory tests are always normal and there is no test that is available at the present time for chronic fatigue syndrome.”  CIGNA’s decision to ignore this explanation was especially egregious given that both the Center for Disease Control and CIGNA’s own health care guidelines explain that there are no specific diagnostic studies specific to the diagnosis of CFS and that chronic fatigue syndrome is diagnosed by excluding other underlying diseases.

After CIGNA denied his claim for disability benefits, Salomaa filed a lawsuit.  In reviewing CIGNA’s decision, the Ninth Circuit noted that because CIGNA both administers the insurance plan and pays benefits out of its own pocket it is operating under a conflict of interest and “has a financial incentive to cheat” Salomaa and other claimants.

While the district court upheld the CIGNA’s claim decision, the Ninth Circuit ruled that CIGNA’s decision was “illogical, implausible and without support.”  In holding that CIGNA abused its discretion, the Ninth Circuit noted that every doctor who personally examined Salomaa determined that he was disabled and that CIGNA unreasonably demanded objective tests to prove the existence of a condition for which there are no objective tests.

The Ninth Circuit also determined that CIGNA failed to provide Salomaa with a full and fair review of his claim.  Specifically, while CIGNA’s internal physicians concluded (without examining Salomaa) that he was not disabled, CIGNA did not “give Salomaa and his attorney and physician access to the two medical reports of its own physician upon which it relied.”  The Court also criticized CIGNA for telling Salomaa that he should provide “x-rays, CT, MRI reports, etc. that support your physician’s assessment,” but failing to tell him exactly what tests it wanted.  Indeed, the Ninth Circuit classified this request as “absurd” since CIGNA was well aware that x-rays, computerized tomography and magnetic resonance imaging are not used to diagnose CFS.  The court explained:

The plan evidently based its denial in large part on review of Salomaa’s file by two physicians, one for the first denial, another for the final denial.  They both wrote their appraisals for the plan administrator.  Yet the plan failed to furnish their letters to Salomaa or his lawyer.  The regulation, quoted above, requires an ERISA plan to furnish “all documents, records, and other information relevant for benefits to the claimant.”  A physician’s evaluation provided to the plan administrator falls squarely within this disclosure requirement.  The disclosure requirement serves the purpose of facilitating what the regulation also requires, providing claimants “the opportunity to submit written comments, documents, records, and other information relating to the claim for benefits.”  Had the plan met its duty of providing copies of its physicians’ evaluations, then Salomaa’s treating physicians could have provided such comments and performed such additional examinations and tests as might be appropriate.  By denying Salomaa the disclosure and fair opportunity for comment, the plan denied him the statutory obligation of a fair review procedure.

As stated by the Salomaa court, in order to “conform to the claim procedure required by statute and regulation,” a plan administrator is required to “explain, upon denial, any additional ‘information needed’” to support a claim for benefits.  The Salomaa court concluded:

The administrator’s procedural violations are similar to those in Saffon v. Wells Fargo & Company Long Term Disability Plan and Boonton v. Lockheed Medical Benefit Plan.  There, as here, the administrator did not provide material sufficient to meet the requirement of “meaningful dialogue.”  We held in those cases, where the denials were based on absence of some sort of medical evidence or explanation, that the administrator was obligated to say in plain language what additional evidence it needed and what questions it needed answered in time so that the additional material could be provided.  An administrator does not do its duty under the statute and regulations by saying merely “we are not persuaded” or “your evidence is insufficient.”  Nor does it do its duty by elaborating upon its negative answer with meaningless medical mumbo jumbo.  In this case, the skeptical look required by us in a case of a conflicted administrator requires us to conclude that the administrator acted arbitrarily and capriciously, both procedurally and substantively, thereby abusing its discretion in the denial of Salomaa’s claim.

Finally, the Ninth Circuit criticized CIGNA for failing to consider Salomaa’s Social Security disability award and for shifting the reason for its denial decision after Salomaa and his physician’s refuted CIGNA’s initial denial decision.

After concluding that CIGNA abused its discretion, the Ninth Circuit remanded the case to the district court with instructions that Salomaa be awarded the disability benefits he initially sought. 

Plan participants will certainly want to use this decision as a key component of their arguments that plan administrators/insurers did not give them a full and fair review. 

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At trial, the parties agreed that the standard of review was de novo since the Plan did not grant discretion to the claims administrator.  Accordingly, the district court placed the initial burden upon Muniz as the claimant to show that he was entitled to benefits under the terms of the plan.  Muniz submitted evidence to the court from his primary physician, Dr. Towner, who concluded that Muniz was totally disabled from performing any occupation.  This, argued Muniz, was sufficient to shift the burden of proof to the Plan to demonstrate that its claim decision was justified.  However, the Ninth Circuit disagreed.  Drawing from decisions in the Eleventh and Eighth Circuits, the Appellate Court concluded that the claimant retained the burden of proving that he was entitled to benefit even in light of the proffered evidence. 

As concluded by other circuit courts which have addressed the question, when the court reviews a plan administrator’s decision under the de novo standard of review, the burden of proof is placed on the claimant.  See, e.g., Horton v. Reliance Standard Life Ins. Co., 141 F.3d 1038, 1040 (11th SCir. 1998) (“A plaintiff suing under [29 U.S.C. § 1132(a) (1)(B)] bears the burden of proving his entitlement to contractual benefits.”); Farley v. Benefit Trust Life Ins. Co., 979 F.2d 653, 658 (8th Cir. 1992) (“[W]e agree that it was [the claimant’s] burden to show that he was entitled to the ‘benefits . . . under the terms of his plan.’ ”) (omission in original) (quoting 29 U.S.C. § 1332(a)(1)(B)).”

In addition, the Ninth Circuit recognized that Muniz could cite to no precedent where a court conducting a de novo review shifted the burden of proof to the claim administrator.  The case law cited by Muniz in support of his argument all dealt with cases where the standard of review was abuse of discretion.  In those situations, the court focused on whether the Plan abused its discretion in denying benefits.  However, under a de novo review, that analysis is irrelevant to the issue of whether the claimant was entitled to benefits.  Similarly, case law that supports burden shifting under an abuse of discretion framework would be irrelevant where the standard of review is de novo.  Since Muniz could not provide any precedent in support, he retained the burden of proof.  The court did note that if the standard of review was abuse of discretion, the burden would shift to the insurer to prove that its actions were not tainted by the structural conflict of interest that results when it review and decides entitlement to benefits and also is the funding source. 

Further, the court addressed Muniz’s argument that once a claimant proves he or she is totally disabled, the burden shifts to the insurer to show an change in condition:

Muniz argues that the district court committed clear error in its analysis because his medical records did not show a change in his condition over the years he was covered by the CGLIC plan. As noted above, the fact that the claimant was initially found disabled under the terms of the plan may be considered evidence of the claimant's disability, but as the Eighth Circuit stated in McOsker v. Paul Revere Life Insurance Co., “[w]e are not suggesting that paying benefits operates forever as an estoppel so that an insurer can never change its mind.” 279 F.3d 586, 589 (8th Cir.2002). Muniz did not provide sufficient evidence to demonstrate that the district court committed clear error in its analysis of the record

After all of the evidence for and against Muniz’s position was balanced against each other, the end result as determined by the district court was that Muniz failed to prove that he was entitled to benefits.  Ultimately, it is not clear whether Muniz would have won his case even if he did not have the burden of proof.  However, this holding creates an additional obstacle for all future claimants and confirms that in the Ninth Circuit, claimants retains the burden of proof for establishing entitlement to benefits under a de novo standard of review.

Litigation pursuant to the Employee Retirement Income Security Act (“ERISA”) is rather unique.  Unlike most cases, ERISA disputes are based on a limited scope of permissible evidence.  The range of that scope is ultimately dependent on which standard of review is employed by the courts.  Typically, when the standard of review is abuse of discretion, the scope of admissible evidence is limited to what was before the claims administrator when the claims decision was made, i.e. the “administrative record.”  The reason for this limited subset of evidence is based on the sole question before the court, namely “Did the claim administrative abuse its discretion in rendering its decision?”  Obviously, evidence discovered or submitted after the claims decision was made would be irrelevant to that question, hence the narrow scope.  However, when the standard of review is de novo, the question before the court changes to whether or not the claimant is entitled to benefits.  In other words, it is simply whether or not the claimant is disabled.  Consequently, this change in question also alters the realm of admissible evidence. 

Recently, the court in Ermovick vs. Mitchell, Silberberg & Knump LLP Long Term Disability Plan, 2010 WL 3956819 (Decided October 8, 2010), addressed the question of whether evidence of procedural deficiencies should be considered in the context of a de novo review.  The facts are relatively straight forward.  James Ermovick worked as a word processor at the law firm of Mitchell, Silberberg & Knump.  His claim for disability benefits was based on depression, anxiety and pain radiating in his back and neck due to myeloradiculopathy.  Ermovick claimed to be totally disabled from any occupation while Prudential, the claims administrator, believed his disability to be temporary and therefore denied his benefits claim. 

The problem the court faced was that the evidence, although relevant to the issue of Prudential’s credibility, was ultimately irrelevant on the narrow issue of whether Ermovick was disabled.  Not to be deterred, Ermovick cited to the 10th Circuit case of Niles v. American Airlines, Inc., 269 Fed. Appx. 827, 833 (10th Cir.2008), which held that “[a] showing that the administrator failed to follow ERISA procedures therefore provides a basis for reversal separate from that provided by de novo review of the merits of the claim.”  There, the court in Niles concluded that such procedural deficiencies effectively created an independent basis for reversal of a claims administrator’s decision.  However, not every circuit believed this to be the case.  For example, the Sixth Circuit took a more hard-line view.  In Wilkins v. Baptist Healthcare System, Inc., 150 F.3d 609, 613 (6th Cir.1998), the court found that analysis of procedural deficiencies were not necessary under a de novo review provided that the denial of benefits was correct.  If the decision made by the claims administrator was ultimately the right one, then the convoluted manner in which it reached that conclusion was irrelevant. 

Since existing case law in the Ninth Circuit did not provide clear guidance, the court in Ermovick came to the conclusion that it should follow the Sixth Circuit rational based on Abatie v. Alta Health & Life Ins. Co., 458 F. 3d 955 (9th Cir. 2006).  In Abatie, the Ninth Circuit held that “even in instances of wholesale and flagrant violations of the procedural requirements of ERISA, the Court's remedy is to accord no deference to the Plan and review the record de novo.”  By according no deference, the Ninth Circuit left no room for an independent basis for reversal.  The Ermovick court interpreted this holding to mean that to give “no deference” also equates to providing to no weight to procedural deficiencies.  There was, of course, one exception to this rule.  Where the procedural deficiencies caused the record itself to be incomplete, then the court may supplement the administrative record with additional evidence. 

In Ermovick, since neither party asked to supplement the record, the court reasoned that the administrative record was complete.  As a result, the court held that evidence of procedural deficiencies was not necessary when the standard of review was de novo.  On that basis, the court proceeded to conduct its own independent review of the record which revealed that despite the errors in handling the case, Prudential’s decision to terminate benefits was correct. 

Assuming the Ninth Circuit doesn’t reverse this decision on appeal, it seems clear that when the standard of review is de novo, the court will not consider procedural deficiencies in ERISA cases. 

Conkright involved Xerox Corporation’s pension plan (“Plan”) in which Xerox acted as the plan administrator (“Plan Administrator”).   The Plan granted the Plan Administrator broad discretion to “[c]onstrue the Plan” and “to take such action as may be necessary to correct [any] defect, rectify [any] omission or reconcile [any] inconsistency”.

Respondents were employees who left Xerox in the 1980’s, received lump-sum distributions of retirement benefits earned up to that point, and were later rehired.  To account for the past distributions when calculating respondents’ benefits, the Plan Administrator initially interpreted the Plan to call for an approach that has come to be known as the “phantom account” method.  Respondents challenged that method in an action under the Employee Retirement Income Security Act of 1974 (“ERISA”).

The District Court granted summary judgment for the Plan, but the Second Circuit vacated and remanded, holding that the Plan Administrator’s interpretation was unreasonable and that Respondents had not received adequate notice that the phantom account method would be used to calculate their benefits.  On remand, the Plan Administrator proposed a new interpretation of the Plan that accounted for the time value of the money Respondents had previously received.  The District Court declined to apply a deferential standard to this interpretation, and adopted instead an approach proposed by Respondents that did not account for the time value of money.  The District Court ordered the Plan Administrators to pay a lump sum in the amount of the difference between their total accrued benefits and the prior lump sum distribution, without any reference to phantom accounts or hypothetical investment gains.

Affirming in relevant part, the Second Circuit held that the District Court was correct not to apply a deferential standard on remand, and that the District Court’s decision on the merits was not an abuse of discretion.  The Second Circuit stated that it was unclear whether a de novo or arbitrary and capricious standard of review applied.  It found, however, that “under either an arbitrary and capricious standard or as a matter of law,” that the Plan Administrator’s use of the phantom account method was a violation of ERISA.

The Supreme Court reversed, holding that the District Court should have applied a deferential standard of review to the Plan Administrator’s interpretation of the Plan on remand.  The Court addressed the standard for reviewing the decisions of ERISA plan administrators in light of Firestone.  Firestone looked to “principles of trust law” for guidance.  Id. at 111.  Under trust law, the appropriate standard depends on the language of the instrument creating the trust.  In Firestone the court held that when a trust instrument gives the trustee “power to construe disputed or doubtful terms, . . . the trustee’s interpretation will not be disturbed if reasonable.”  Id.  The Court explained that under Firestone and the Plan’s terms, the Plan Administrator would normally be entitled to deference when interpreting the Plan.  The Court of Appeals, however, crafted an exception to Firestone deference, holding that a court need not apply a deferential standard when a plan administrator’s previous construction of the same plan terms was found to violate ERISA.

The Court found that the Second Circuit’s “one-strike-and-you’re-out” approach had no basis in Firestone.  The Court explained that the Plan granted the Plan Administrator general interpretive authority without suggesting that the authority was limited to a first effort to construe the Plan and noted that although trust law does not resolve the specific question of whether courts may strip a plan administrator of Firestone deference after one good faith mistake, guiding principles underlying ERISA do.  The Court placed significant importance on the conclusion that Firestone deference serves the “interest of uniformity, helping to avoid a patchwork of different interpretations of a plan, like the one here, that covers employees in different jurisdictions---a result that ‘would introduce considerable inefficiencies in benefit program operation, which might lead those employers with existing plans to reduce benefits, and those without such plans to refrain from adopting them.’” The Court, seemingly annoyed at the District Court’s interpretation of the Plan that did not include the time value of money, recognized that according to actuaries this interpretation was “highly unforeseeable.”

Respondents asserted that deference is less important once a plan administrator’s interpretation has been found unreasonable, but the court rejected this, stating that the interests in efficiency, predictability, and uniformity do not suddenly disappear simply because of a single honest mistake.  

The Court dismissed Respondents’ claim that plan administrators will adopt unreasonable interpretations of their plans, receiving deference each time, thereby undermining the prompt resolution of benefit disputes, driving up litigation costs, and discouraging employees from challenging plan administrators’ decisions.  The Court explained that these concerns were “overblown.”  But, the Court acknowledged that multiple erroneous interpretations of the same plan provision, even if issued in good faith, could support a finding that a plan administrator is too incompetent to exercise his discretion fairly.  The Court determined that applying a deferential standard of review also does not mean that the plan administrator will always prevail on the merits.  It means only that the plan administrator’s interpretation “will not be disturbed if reasonable.”

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Sacks v. Standard Ins. Co., __ F. Supp. 2d __, 2009 WL 4307558 (C.D. Cal. 2009) is one of the first cases to address the abuse of discretion standard of review since the Ninth Circuit’s important decision in Montour.  In Sacks, the claimant was a mortgage underwriter for Countrywide Home Loans.  Standard Insurance Company (“Standard”) was the claims administrator and insurer for the Countrywide Home Loans Long Term Disability Plan (the “Plan”).  After her claim for long-term disability benefits was denied, the claimant sued Standard Insurance in federal courts for benefits under the ERISA.

The court recognized that the Plan granted Standard with discretionary authority.   However, since Standard provided the funds and made the decision concerning benefits, it operated under a structural conflict of interest.  At issue was how to apply the standard of review in light of the conflict of interest and the recent Ninth Circuit opinion in Montour.  Here, the court recognized that the “abuse of discretion” standard of review does not change just because there is a conflict of interest.  Instead, the factual circumstances surrounding the conflict of interest is a factor providing weight in the overall analysis of whether an abuse of discretion occurred.  As a result, the court in Sacks gave greater weight to the conflict of interest for a variety of reasons including because Standard used an erroneous occupation criteria to evaluate Plaintiff’s claim, failed to consider the effects of the claimant’s medication on her ability to perform her own occupation, and failed to adequately investigate the claim.  In addition, the court highlighted the fact that Standard failed to conduct follow-up testing as recommended by the IME physician and instead merely accepted the part of the physician’s conclusion that supported its claims decision.  These actions, the court found, warranted greater skepticism of Standard’s claims decision.  Accordingly, the court found that Standard had abused its discretion and reversed the claim decision by awarding the plaintiff benefits.

Expect to see more district courts to focus their analysis on these and other self-interest factors as they assess how much weight to give to an insurer’s conflict of interest.   Also expect to see more district courts applying the Montour analysis to find that administrators have acted in a manner that evidences their self-interest and to award more ERISA participants their benefits under insured benefit plans.

The employee benefit plan in this case is known as a “top hat” plan. ERISA “defines a top hat plan as one which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees.” Sznewajs at *4. Because of the specialized nature of “top hat” plans, Congress exempts such plans from certain ERISA regulations.  Gilliam v. Nevada Power Co., 488 F.3d 1189, 1192-93 (9th Cir. 2007).

In most ERISA cases, the administrator’s claim decision is reviewed under the de novo standard of review unless the plan documents grant the administrator discretionary authority.  Here, Franciene argued that, despite the discretion granted to the plan administrator, the district court should utilize the de novo standard of review because payments made to beneficiaries come directly from the company’s pockets and those payment decisions are made by the company’s executive committee. Franciene’s argument was consistent with holdings in the Third and Eighth Circuits, both of which have ruled that “top hat” plans are subject to a de novo standard of review despite the existence of a grant of discretionary authority for the very same reasons. However, the Ninth Circuit disagreed, explaining that applying a de novo standard of review to “top hat” plans “would create unnecessary confusion.” Therefore, in the Ninth Circuit, “top hat” plans are subject to the same standard of review analysis as other ERISA plans.

Finally, in making this ruling, the court found that the Plan did not abuse its discretion in its interpretation of the term “retirement.”

Robert Montour was a telecommunications manager for Conexant Systems, Inc. His employer provided him with a group long-term disability plan governed by ERISA. Hartford was both the insurer and claims administrator of the plan. The plan granted Hartford discretionary authority to interpret plan terms and to determine eligibility for benefits.

Montour applied for and received disability benefits, initially for an acute stress disorder, in 2003. In 2004, Montour consulted an orthopedic surgeon, Dr. Kenneth Kengla, about knee and back pain and subsequently underwent surgery. Dr. Kengla diagnosed Montour with degenerative changes in both areas and notified Hartford that Montour was suffering from physical disability which prevented him from returning to the labor force. Dr. Kengla listed numerous restrictions on Montour’s physical activities.

In November and December 2005 Hartford conducted surveillance on Montour over the course of four days. Video footage from this surveillance depicted Montour driving his car along with other activities. Shortly thereafter, a Hartford investigator conducted a personal interview with Montour at his home, during which Montour listed a “bad back, [an] arthritic right knee, and sleep apnea” as the “disabling medical condition(s)” preventing him from returning to work. He also described an inability to concentrate, which he attributed to the medication he must take to treat his “constant pain.” Montour acknowledged that the surveillance video footage accurately depicted his level of functionality.

In May 2006 a Hartford nurse case manager submitted a letter to Dr. Kengla indicating that Montour was capable of performing “sedentary to light” work and soliciting their agreement. Dr. Kengla indicated that he disagreed with Hartford’s conclusions, citing Montour’s persistent orthopedic symptoms and physical restrictions.

In July 2006 Hartford hired a consulting physician, Dr. Gale Brown, to conduct a file review. Dr. Brown concluded that medical evidence supported the existence of a lower back condition but that Dr. Kengla’s offered restrictions were excessive. He acknowledged that the medical evidence supported Montour’s chronic pain but found that Montour was nevertheless capable of working full-time with modest restrictions, such as changing positions every thirty to forty-five minutes.

After Hartford enlisted a vocational rehabilitation expert to compile an Employability Analysis Report which concluded that Montour was capable of working in a high-level managerial capacity in five different fields, in August 2006 Hartford denied his claim. Montour appealed this decision and included a vocational appraisal report which concluded that Montour was “not employable in any setting” and that Hartford’s decision was based on numerous mistakes, including a disregard for the fact that the Social Security Administration (SSA) considered Montour to be “totally disabled.”

In response, Hartford hired a physician to conduct a second file review. The physician reviewed Montour’s records for evidence of a physical condition that would preclude sedentary work and, like Dr. Brown, found none. He noted in particular a lack of objective, clinical data demonstrating the extent to which Montour’s pain impacted his functionality. He also noted that Montour’s activities depicted on the surveillance videos exceeded the activity requirements of a “sedentary” job.

In light of concerns raised in the vocational appraisal report, Hartford requested a vocational specialist to conduct an Employability Analysis Report addendum, which reached the same conclusion as the initial Employability Analysis Report regarding the sedentary nature and thus the feasibility of the five proposed managerial positions. In February 2007, a Hartford appeal specialist affirmed the company’s previous decision to terminate Montour’s benefits. In a bench trial, the district court rendered its decision in favor of Hartford, upholding its denial.

In reversing the district court, the Ninth Circuit first explained that when an ERISA plan grants the administrator discretionary authority to determine eligibility for benefits or to construe the terms of the plan, the court reviews the decision for abuse of discretion. The court agreed with the district court that the abuse of discretion standard applied and that Hartford had a conflict of interest. However, the appeals court criticized the district court’s application of the “clear error” test, explaining that a reviewing court must also take into account the administrator’s conflict of interest as a factor in the abuse of discretion analysis. The appeals court concluded that the district court’s decision did not adequately balance the conflict factors. Accordingly, the appeals court proceeded to do so.

The appeals court gave a comprehensive description of the “signs of bias” it found were exhibited by Hartford throughout the decision-making process. These included overstatement of and excessive reliance upon Montour’s activities in the surveillance videos Hartford’s decision to conduct a paper review rather than an “in-person medical evaluation;” Hartford’s insistence that Montour produce objective proof of his pain level; and Hartford’s failure to deal with and distinguish the Social Security Administration’s contrary disability decision. The appeals court also noted Hartford’s “failure to present extrinsic evidence of any effort on its part to ‘assure accurate claims assessment.’”

The appeals court concluded that Hartford’s bias had infiltrated the entire administrative decision-making process, leading the court to accord significant weight to the conflict of interest. Weighing all of the factors together, the court concluded that Hartford’s conflict of interest improperly motivated its decision to terminate Montour’s benefits. The court reversed and remanded the matter for entry of judgment in favor of Montour and for reinstatement of long-term disability benefits.