This month’s Friday Five explores recent decisions tackling a myriad of issues, including: (1) whether reclassification of a claimant’s health status constitutes an adverse benefit determination; (2) whether remand is the proper remedy for a claim denied on coverage grounds; (3) whether a disagreement over the benefits decision may amount to bad faith; (4) whether attorney fees are admissible as a component of consequential damages; and (5) when extrinsic evidence may be admissible.

1. The reclassification of a claimant’s health status does not constitute an “adverse benefit determination” under ERISA claims procedures. The U.S. Court of Appeals for the Second Circuit held that an administrator’s decision to reclassify a claimant’s health status while a claimant is receiving disability payments is not an “adverse benefit determination,” even when such a decision limits maximum benefits available to a claimant. In the underlying case, the plaintiff filed a claim for long-term disability following a cycling accident in July 2011. Initially, Liberty paid the plaintiff’s claim through September 2017, but then terminated benefits under the terms of the plan and policy documents. The plaintiff administratively appealed the termination. Subsequently, in September 2018, Liberty reversed its decision to terminate benefits but also informed plaintiff that her updated medical records supported a mental health impairment only (not a physical impairment). This reclassification meant that disability benefits would be capped at eighteen months. Applying this reclassification, Liberty paid disability benefits to the plaintiff through the eighteen-month period. Liberty then notified the plaintiff that her benefits would terminate in accordance with the policy’s mental/nervous limitation, and that she had 180 days to administratively appeal the termination. The plaintiff did not file an administrative appeal, however. She filed a lawsuit instead. Liberty filed a motion to dismiss. In responding to the motion, the plaintiff claimed that Liberty’s September 2018 reclassification letter “unilaterally changed the scope of her benefits” and therefore “if an appeal was required,” Liberty should have “apprised of her ERISA rights” at that time. Both the District Court and the Second Circuit rejected the plaintiff’s argument. According to the Second Circuit, the reclassification letter announced the “new disability classification and provided a termination date for benefits based on that disability.” As a result, the letter did not mark a “reduction” of her benefits but rather a “continuation of her benefits under a different classification.” Ruderman v. Liberty Mut. Grp., Inc., No. 21-817, 2022 WL 244086 (2d Cir. Jan. 27, 2022).
2. When an ERISA administrator denies a benefit claim because the claimant is not an eligible plan participant, remand is the proper remedy. The U.S. Court of Appeals for the Fifth Circuit held that when a claims administrator’s decision is limited to coverage, the proper remedy for a reviewing court is remand, not an award of benefits. In the underlying case, the plaintiff, Newsom, worked as a software architect for Lereta for over twenty years. By September 2017, however, his health deteriorated to the point that he could no longer work a 40-hour week. Lereta reduced Newsom’s scheduled work week to 32 hours, which was still considered full time. However, he was unable to consistently work a full 32-hour week. In October 2017, Lereta placed Newsom on part-time status, scheduling him for less than 30 hours per week. By January 30, 2018, he was unable to work at all. Newsom submitted a claim for short-term disability (STD) benefits under Lereta’s ERISA-governed disability plan, which was ultimately approved by Reliance, the plan’s insurer. However, Newsom’s claim for long-term disability (LTD) benefits was denied because Reliance did not consider him an “active, Full-time employee.” Under the policy, “Full-time” meant “working for ... a minimum of 30 hours during a person’s regular work week.” Regular work week, however, was not defined. After exhausting administrative remedies, Newsom filed a lawsuit contending that Reliance's interpretation of the “full-time” provision in its LTD policy was unreasonable because an employee would fall in and out of coverage based on the number of hours that employee actually worked each week. The district court agreed with Newsom that “regular work week” essentially meant the “scheduled work week” thus “actual hours worked” were not determinative. Notably, the court further found that Newsom became disabled in October of 2017. As a result, the court ordered Reliance to pay Newsom benefits through the date of judgment. Reliance appealed on several grounds, including that the court should have remanded the case to Reliance instead of awarding benefits. The Fifth Circuit agreed. Although it affirmed the judgment of the district court as to Newsom's eligibility for LTD benefits, it vacated the judgment as to Newsom's entitlement to LTD benefits. In doing so, the appellate court noted that “in ERISA cases judicial review is limited to the administrative record, and the record tried by the district court in this case was limited to Reliance's eligibility determination.” Therefore, the district court “conflated the issues of eligibility and disability” which, the Fifth Circuit determined, was improper. Accordingly, the case has been remanded to the district court with instructions to remand Newsom’s claim back to the administrator. Newsom v. Reliance Standard Life Ins. Co., No. 20-10994, 2022 WL 500403 (5th Cir. Feb. 18, 2022).
3. To show bad faith, there must be more than a disagreement over the decision. An insured has to show that the insurer ignored its duties as an insurer. When a plaintiff sought long-term disability benefits from Union Security Insurance Company and Sun Life Assurance Company of Canada, those companies engaged two doctors to review her file. The doctors concluded that she was not disabled beyond 24 months and her LTD claim was denied. The plaintiff filed a lawsuit against USIC and Sun Life alleging not only breach of contract, but also insurance bad faith. This decision involved the defendants’ motion to dismiss the bad faith count. In granting the defendants’ motion, the court aptly noted that: “[t]wo different people can view the same facts and reach different conclusions. Insurance law recognizes this principle and commands that substantive disagreements do not amount to bad faith. Instead, to show an insurance company's bad faith, an insured has to show that the insurer ignored its duties as an insurer.” Under those contours, and for purposes of the bad faith count, the court drew a line between what the defendants could have done and what the defendants were obligated to do. Specifically, the court rejected the plaintiff’s criticisms that the examining physicians did not perform in-person examinations, contact her physician, or have specialized board certifications. None of this was required by the plan or policy documents, and therefore none of the plaintiff’s criticisms “demonstrate that reckless disregard or willfulness necessary for a bad faith claim.” For that reason, the bad faith claim was dismissed. Schultz v. Union Security Ins. Co., No. 2:21-cv-03511, 2022 WL 394755 (E.D. Pa. Feb. 9, 2022).
4. Attorney fees are not admissible as a component of consequential damages under New York law. When the defendants Provident Life and Casualty Insurance Company and The Unum Group terminated the plaintiff’s disability benefits, he claimed they breached four individual disability insurance policies. In his lawsuit, the plaintiff claimed he was entitled to not only “contract damages,” but also to “consequential damages.” The question then became whether evidence of attorney fees should be admissible as a component of the consequential damages sought by the plaintiff. The parties filed cross motions in limine. The court applied New York law. Under New York law, a prevailing party in a breach of contract case may not collect attorneys' fees unless such award is authorized by an agreement between the parties, statute, or court rule. Using this premise, the court found that attorney fees are not a part of consequential damages and therefore the plaintiff’s MIL was denied and the defendant’s MIL was granted. (*This decision also addresses motions in limine on whether to admit or reject (1) evidence of whether the policies required objective evidence to prove total disability; (2) evidence that the plaintiff refused surgical intervention; and (3) evidence relating to an occupational standard different than the one defendants applied during the claims administration). Allen v. First Unum Life Ins. Co., No. 2:18-cv-00069-JES-MRM, 2022 WL 528245 (M.D. Fla. Feb. 22, 2022).
5. Where extrinsic evidence does not relate to a structural and procedural conflict of interest, it should not be admissible under Ninth Circuit law. In an ERISA LTD termination action, the plaintiff asked the court to consider three forms of extrinsic evidence: (1) audio recordings of “his conversations with [the defendant's] agents during the relevant time of his plan”; (2) his job description; (3) and the defendant's life insurance and “other key Plan definition and insurance documents.” Applying Ninth Circuit law, the court cautioned that although evidence outside the administrative record may be considered “to decide the nature, extent, and effect on the decision-making process of any conflict of interest,” once the conflict (if any) has been established then a decision on the merits “must rest on the administrative record.” Within that limitation, the court examined the plaintiff’s request. Here, the plaintiff argued for the admission of the extrinsic evidence to demonstrate that the administrator “applied self-serving selectivity in the use and interpretation of physician's reports” and “ignored the lack of report on mental disability and lack of job description data.” The plaintiff added that the extrinsic evidence is “crucial” because it “eliminat[es] elements from future dispute,” and “serves as an undisputed evidence base for [p]laintiff's contemporaneously submitted ‘Motion for Summary [Judgment].” Given this argument, the court was not persuaded that the extrinsic evidence was relevant as to whether there were structural and procedural conflicts of interest. Instead, the court held that the evidence the plaintiff sought to admit was relevant to whether the plaintiff was wrongfully denied his disability benefits under the Plan. Therefore, the plaintiff’s motion was denied. Zelhofer v. Metropolitan Life Insurance Company, No. 2:16-cv-00773-TLN-AC, 2022 WL 525562 (E.D. Cal. Feb. 22, 2022).