This month’s Friday Five covers cases relating to: (1) whether a state statute prohibiting discretionary authority in disability benefit plans applies to non-state residents; (2) how a court may weigh multiple denials and reversals of denials in determining whether a claim administrator acted arbitrarily and capriciously; (3) whether a plan may be penalized for procedural conduct after remand for a review of benefit determination; (4) how benefit payments are calculated according to the terms of a benefits plan; and (5) whether a plaintiff counsel’s demand letter satisfies or excuses the requirement to exhaust administrative remedies.

1. When does state law overrule a plan’s provision for discretionary authority? California Insurance Code § 10110.6(a) states that if a policy provides disability insurance coverage “for any California resident,” any discretion granting language is “void and unenforceable.” The disability benefits plaintiff in Mayer v. Ringler Assocs. Inc. argued that the California statute’s exclusionary language applied because the plan was delivered in California. The Court of Appeals for the Seventh Circuit disagreed, and held that the statute applied only to California residents. The court acknowledged that because the statute focuses on “California resident[s],” it is possible to read the provision to void all grants of discretion in any group policy, such as the one at issue here, that provides benefits to even one California resident, even if the claimant himself is not a California resident and not otherwise connected to California. However, the court reasoned that such an interpretation would raise concerns under the Commerce Clause of the U.S. Constitution because it would allow for “the application of a state statute to commerce that takes place wholly outside of the State's borders, whether or not the commerce has effects within the State.” In this case, it was undisputed that the claimant was a resident of New York at all relevant times. He sold annuities, became disabled, and applied for long-term disability benefits in New York. The court held that to void the grant of discretionary authority to the claims administrator with respect to a New York resident’s disability claim arising from activity in New York would have the impermissible “effect of requiring out-of-state commerce to be conducted at the regulating state's direction.” Mayer v. Ringler Assocs. Inc., No. 20-1281, __, F.4th __, 2021 WL 3556473 (2d Cir. Aug. 12, 2021).
2. Do multiple claim denials and reversals indicate an arbitrary and capricious determination? Although denial of a benefits claim and subsequent reversal of the denial is not unusual, a plaintiff may assert that multiple denials and reversals demonstrate arbitrary and capricious decision-making on the part of a claims administrator in handling the claim. However, the District Court for the Western District of Wisconsin rejected this argument in Crista v. Wisconsin Physicians Serv. Ins. Corp., finding that, although it was “troubled by some of [the claim administrator’s] actions during its multi-year review process,” the denials were appropriate following a review of the complete medical records. Among other things, the plaintiffs criticized the administrator for its “course-reversal,” having granted some of plaintiffs’ benefit requests and denying others. The court determined, however, that conflicting medical evidence and questions that the administrator received from the plaintiffs “provided a legitimate basis” for the administrator to request further outside reviews. Moreover, the final denial was not “out of the blue” because the administrator had initially denied plaintiffs’ benefit claims, only approving them on appeal. Accordingly, the previous grant of benefits cut neither for nor against either party. The court also acknowledged that “an ERISA benefit cannot be a moving target where the plan administrator continues to add conditions precedent to the award of benefits.” Applying this rationale, the court held in a prior case that the claim administrator acted arbitrarily and capriciously in part because it invited additional evidence to establish a disability, but when the plaintiff provided it, the administrator repeatedly found that the new evidence was not sufficient under new standards or expectations that had not been communicated to the claimant. But this was not the case in Crista. The court found that the claim administrator never conceded that the claimed medical diagnosis had been established, and when the requested medical records were provided, the administrator ultimately determined that they were not supportive of the diagnosis that the claimant asserted. The court concluded that “[r]equesting historical medical documents, then considering those documents in rendering an ultimate result, cannot reasonably be considered ‘moving the target,’” and so the court did not find capriciousness on this basis. Crista v. Wisconsin Physicians Serv. Ins. Corp., No. 18-CV-365, 2021 WL 3511092 (W.D. Wis. August 10, 2021).
3. Can a plan administrator be penalized for procedural conduct after remand? Plan administrators often send numerous communications to claimants during the claim and appeal process. The Court of Appeals for the Ninth Circuit recently clarified that this consistent communication must continue during the litigation stage. In Dimry v. Bert Bell/Pete Rozelle NFL Player Ret. Plan, the plaintiff won two favorable federal court judgments against the NFL’s retirement and disability plan in his action to recover long-term group disability benefits. On finding an abuse of discretion in denying his disability benefits claims, the District Court remanded his case to the plan administrator for a renewed evaluation of the case. The Court of Appeals later found that the plan committed procedural error on remand. The court explained that, under ERISA, when a plan administrator denies a claim, it must provide the claimant with a “full and fair review.” In the Ninth Circuit, a “full and fair review” requires a “meaningful dialogue” with the plan beneficiaries, including requesting more information when needed. The court found that the administrator in Dimry failed to meet this duty because the claimant and his counsel were “in the dark during the entirety of the remand process.” Specifically, the plan did not notify the claimant that the remand process had begun or how the process would take place, nor did it inform the claimant of its plan to reopen the record for medical reports, or allow the claimant an opportunity to respond to those reports. Finding that the plan committed procedural error by excluding the claimant from the process following remand, the Court of Appeals remanded to the District Court with directions to determine whether the plaintiff is entitled to benefits. Dimry v. Bert Bell/Pete Rozelle NFL Player Ret. Plan, No. 20-17049, __ Fed. Appx. __, 2021 WL 3509349 (9th Cir. Aug. 10, 2021).
4. How should monthly income be calculated for purposes of issuing disability benefits? Claim administrators and claimants alike typically look to the language of a plan and the claimant’s pre-disability salary to determine the benefit amount on an approved disability claim. Litigation may ensue when a scenario arises that is not addressed in the terms of the plan and a claimant is unsatisfied with the amount of their disability payment. In Morris v. Aetna Life Ins. Co., the plaintiff filed an ERISA action against her employer’s disability claim administrator after it sought to recover $56,478.17 in overpayment of disability benefits that it paid over the course of several years. The parties agreed that the terms of the benefits plan provided that plaintiff was insured for 60 percent of the amount of salary or wages that she was receiving from her employer prior to her disability, calculated on a monthly basis. The court rejected plaintiff’s argument that this calculation should include forms of compensation beyond her base salary, such as bonuses, because the plaintiff presented no evidence showing the amounts of the bonuses she received and conceded that she could not provide a specific calculation to reflect her bonus payments. The court also rejected the plaintiff’s argument that the benefits payments, issued on a monthly basis, were incorrect because she did not work on an annual contract basis, but merely as an “exempt employee,” which the plan did not address. The court reasoned that as an exempt employee, the plaintiff was paid an annual salary such that the only proper way to calculate her monthly benefits was to divide her annual salary by twelve. This comported with the plan’s purpose of providing benefits based on a worker’s salary calculated on a monthly basis. Finding no ambiguity in the plan, the court held that the plaintiff was not entitled to recover the overpayment monies collected by the claim administrator. Morris v. Aetna Life Ins. Co., Case No. 8:20-cv-00821-SB-GJSx, 2021 WL 3509553 (C.D. Cal. Aug. 9, 2021) (Judge Stanley Blumenfeld, Jr.).
5. Does a demand letter satisfy or excuse the requirement to exhaust administrative remedies? Courts widely accept that the exhaustion of administrative remedies is required before a plaintiff can bring an action in federal court to recover benefits under an ERISA plan. The U.S. District Court for the District of Illinois reinforced the requirement for administrative exhaustion by granting the defendant’s motion to dismiss in Pierce v. Flsmidth, Inc., finding that the allegations contained in the amended complaint failed to satisfy the requirement. The plaintiff, the beneficiary of her deceased husband’s benefits plan, sued his employer alleging that it breached its fiduciary duty under ERISA by failing to notify the husband of the active employment provisions in its life insurance benefit plan. The employer filed a motion to dismiss, arguing that the plaintiff had failed to exhaust her administrative appeals under the plan before filing suit. The plaintiff contended that she exhausted her appeals when her attorney sent a letter to Lincoln Life Assurance Company of Boston, the claim administrator, after it denied her claim. The court disagreed, finding that the letter made “no mention of a breach of fiduciary duty claim against the Defendant,” nor did it “request administrative review of that claim.” Instead, the letter merely threatened to sue Lincoln “if the matter was not resolved favorably for the Plaintiff.” The court further found that the plaintiff could only be excused from failing to exhaust administrative remedies where there was a lack of meaningful access to review procedures, or where pursuing internal plan remedies would be futile. Because the plaintiff failed to allege sufficient facts to meet either of these exceptions, the court declined to excuse the exhaustion requirement. Pierce v. FLSmidth, Inc., No. 20-CV-1369, 2021 WL 3502463 (C.D. Ill. Aug. 9, 2021).