De novo review lives (in the 10th Circuit, at least)

I have on multiple occasions bitched, moaned, whined and otherwise griped about the unholy abomination that is the federal Employee Retirement Income Security Act of 1974 (“ERISA”). Opportunities to pass along ERISA-related good news don’t come along that often, but we got one earlier this week, and it definitely warrants a bit of discussion.

As we’ve seen before, ERISA authorizes employees to sue in federal court to recover benefits to which they’re entitled under their employer-provided benefit plans. Unfortunately, the federal judiciary has long been renowned for its predisposition toward wrapping its lips lovingly around the insurance industry’s aching, tumescent Johnson and comfortably sucking the industry to the point of release. That predisposition appears in abundance in ERISA cases.

For one thing, insurance companies and self-funded employee benefit plans invariably include provisions in the plan documents under which benefits denials are subject to one or more levels of in-house “appellate review.” In other words, if the insurance company denies your claim you must appeal that decision to the insurance company, which then gets to decide whether or not it acted properly in denying your claim.

You can guess how those “appeals” generally come out, but the painfully obvious fact that in-house “appeals” are textbook exercises in futility is wholly irrelevant in federal court. You must comply with all of the plan’s in-house “appeals” procedures. If you don’t, the federal court in which you file suit will dismiss your case for “failure to exhaust administrative remedies.”

In addition, though federal law allows courts to review an ERISA plan’s decision to deny benefits, federal courts exercise that authority with substantially less than boundless enthusiasm. In Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), the Supreme Court set up a default rule under which courts must review an ERISA benefits denial de novo,  meaning the court gives no deference to the ERISA plan’s decision at all. However, Firestone also endorsed including language in ERISA plan documents giving the plan administrator sole and absolute discretion in interpreting and applying the plan’s terms, as well as determining eligibility for benefits. If the magic language appears in the plan, then judicial review of a benefits denial is limited to whether the plan administrator acted “arbitrarilty and capriciously.” Under that standard, the benefits denial stands if there’s any remotely reasonable basis for the administrator’s decision. Application of arbitrary-and-capricious review generally means that the federal court acts as a rubber stamp for ERISA plan administrators.

If the notion that an insurer or self-funded employee benefit plan can exempt itself from meaningful judicial review by unilaterally inserting a nyah-nyah-na-nyah-nyah clause into the pertinent plan documents sounds, well, TOTALLY FUCKING INSANE to you, that’s because it IS totally fucking insane. But there it is nonetheless.

In 2003 the U.S. Court of Appeals for the Tenth Circuit, the territorial jurisdiction of which includes Oklahoma, Kansas, New Mexico, Colorado, Wyoming and Utah (as well as the parts of Yellowstone National Park extending into Montana and Idaho), decided Gilbertson v. AlliedSignal, Inc., 328 F.3d 625 (10th Cir. 2003). In that case, the employee benefit plan included the magic “sole and absolute discretion” language, but the plan administrator didn’t issue any decision on the plaintiff’s claim for disability benefits. Many months after the regulatory deadlines for making a decision, the plaintiff filed suit. The trial court, applying “arbitrary and capricious review,” dismissed the lawsuit.

Department of Labor regulations then in effect provided that failure to issue a decision within the regulatory deadlines (generally 90 days for an initial claim and 60 days for an in-house “appeal”) meant that the claim was “deemed denied.” The Tenth Circuit held that a plan administrator isn’t entitled to a deferential standard of review in federal court unless the administrator actually exercised the discretion conferred by the plan within the time alloted by law. Absent an actual, timely decision, Firestone‘s default de novo standard of review applies unless the administrator can prove “substantial compliance” with the regulatory deadlines. Substantial compliance requires a showing that the delay in issuing a decision was both “inconsequential” and the product of “an ongoing productive evidence-gathering process in which the claimant is kept reasonably well-informed as to the status of the claim and the kinds of information that will satisfy the administrator.” 328 F.3d at 636.

Gilbertson gave claimants a path to de novo review other than the one recognized in Firestone. The Supreme Court case law suggests that de novo review is allowed only when a plan does not include the magic language. Gilbertson hold that de novo review can be available even if the magic language is there. The heightened level of judicial review basically serves as a sanction for (and thus a deterrent to) inexcusably dilatory conduct.

The Gilbertson Court noted that after the events at issue in that case the Labor Department amended its ERISA regulations. The time limits stayed essentially the same, but the provision that noncompliance with the deadlines resulted in a claim being “deemed denied” was replaced with one stating that noncompliance meant that the claimaint was “deemed to have exhausted . . . administrative remedies.” The Gilbertson Court expressed no opinion on whether its standard-of-review analysis  would apply in cases governed by the amended regulations.

The Tenth Circuit addressed the continuing viability of Gilbertson in Rasenack v. AIG Life Ins. Co. (pdf, 33 pages), decided on Monday. There, a Colorado man was creamed by a hit and run driver, leaving him permanently brain-injured and otherwise severely disabled. The injured person worked for Marriott International, which had an employee benefit plan that included accidental death and dismemberment (“AD&D”) benefits under a policy issued by AIG Life Insurance Company. (Yes, AIG Life is part of the same motley band of sink-or-swim free marketeers that’s received hundreds of billions of dollars in largess from the American taxpayer.)

The AD&D policy included a rider under which the employee is entitled to benefits if he suffers “hemiplegia,” which the policy defines as the “complete and irreversible paralysis of the upper and lower limbs of the same side of the body,” within 365 days of an accidental injury. Mr. Rasenack purchased the basic AD&D coverage and the supplemental hemiplegia coverage through payroll deductions.

Mr. Rasenack’s spouse, who was appointed his guardian and conservator after the accident, made a claim for hemiplegia benefits based on the fact that Mr. Rasenack’s left arm and left leg were paralyzed as a result of the hit-and-run.

AIG denied the claim. The AD&D policy did not define the term “paralysis.” AIG hired a couple of whores with medical degrees to opine that Mr. Rasenack was not hemiplegic because the medical records indicated that he some de minimis movement in his left hand. According to said whores, any movement at all = no “paralysis” and therefore no hemiplegia. AIG was unimpressed with the conclusions of Mr. Rasenack’s treating physician and a nurse AIG itself hired to interview Mr. Rasenack,  both of whom stated in no uncertain terms that he was hemiplegic. Nor was AIG persuaded by the fact that a number of well-recognized medical authorities define “paralysis” in ways that do NOT require a total absence of movement.

AIG’s troubles in this case started with its laughably egregious disregard for regulatory guidlelines. The standard deadline for deciding an intial claim is 90 days, with an absolute maximum limit of 180 days. AIG took sixteen months to deny Mr. Rasenack’s claim.

In-house “appeals” have to be decided within 60 days, up to a maximum of 120 days. When AIG failed to act on an appeal after eight months, Mr. Rasenack filed suit in the U.S. District Court for the District of Colorado. Only after the lawsuit was filed did AIG bother to deny the appeal.

Despite AIG’s egregious and unjustifiable delays, the trial court declined to review AIG’s actions de novo. The AIG policy included the magic Firestone language. The court noted that Gilbertson was based on a now-superseded version of Labor Department ERISA regulations and that, in any event, AIG did exercise its discretion (albeit belately) by denying the claim. The lower court, applying a somewhat modified version of arbitrary-and-capricious review, dismissed Mr. Rasenack’s lawsuit.

On appeal, a unanimous three-judge panel of the Tenth Circuit held that the above-described change to ERISA regulations did not render Gibertson inapplicable. Slip op. at 8. The court of appeals also rejected the rather silly contention that the fact that AIG eventually issued decisions on the intial claim and the appeal rendered arbitrary-and-capricious review appropriate. The court ruled that there’s no meaningful distinction between issuing a decision long after expiration of the applicable deadlines, as happened here, and issuing no decision at all.

Rasenack also illustrates the potential benefits of de novo review. For one thing, in de novo review cases the court must apply the rule of insurance policy construction under which any ambiguities are construed strictly against the insurer and strictly in favor of the insured. The court of appeals found that the undefined term “paralysis” was  ambiguous in the context of this policy, and on that basis ruled that AIG wasn’t allowed to define the term in a way that required proof of a total absence of movement.

We can expect AIG to demand an en banc review of this decision. If that fails, they’ll probably seek review in the U.S. Supreme Court. For now, though, claimants can take comfort in knowing that not all federal courts are completely goddamned unreasonable when it comes to ERISA claims. Such tepid declarations aren’t ordinarily anything to write home about, but in the ERISA context it’s a very big deal indeed.

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