The Second Circuit Court of Appeals, in Tyll vs. Black and Decker Life Insurance Program, has ruled that a plan document is not required to use any specific language in order to give the plan discretionary authority when reviewing claims against the plan.
Facts. The spouse of a deceased participant in an accidental death benefits plan sued the plan and its insurer after she was denied benefits because the plan’s insurer determined that the participant’s death was not an “accident” as defined in the plan’s insurance contract. After the district court ruled in favor of the plan and insurer, the spouse appealed to the Second Circuit, arguing that the district court committed a reversible error by reviewing the denial of benefits under an “abuse of discretion” standard rather than a “de novo” standard. The appeal was based on the fact that, rather than specifically giving the plan or insurer “discretionary authority,” the plan provided that “[t]he insurance company will decide claims and appeals in accordance with its reasonable claims procedures.”
Law. Generally, the default standard of review for benefit denials in an ERISA-covered plan is a de novo standard of review, which means that a court will independently review a claim and not defer to the plan administrator’s, or insurer’s, decision. However, if the plan document (or insurance contract) grants discretionary authority to determine benefit entitlement, the court applies a less demanding “abuse of discretion” standard of review, under which the plan’s or insurer’s decision will be upheld unless it is determined to be “without reason, unsupported by substantial evidence or erroneous as a matter of law.”
Appeals Court. On appeal, the Second Circuit determined that the plan’s provisions “establish a subjective standard by which [the insurer] can make claims eligibility decisions”, and, therefore, the plan delegates discretionary authority to the insurer over benefit claims and denials. It ruled that the word “reasonable” indicates a discretionary standard because there is a broad range of permissible choices within which the insurer may resolve claims.
It also noted that the plan gave discretion to the insurer, among other things, to establish plan rules and procedures. Therefore, the insurer’s decision to deny benefits should be reviewed under the abuse of discretion standard.
The spouse had argued that a de novo standard should be used because the plan could have more clearly delegated discretionary authority to the insurer. However, the Appeals Court said that, “(t)he question before us, however, is not whether the delegation of authority could have been expressed more clearly but whether the language of the…Plan adequately communicated a delegation of discretionary authority. It did.”
Therefore, the Court ruled that the proper standard of review had been used by the lower court and rejected the spouse’s appeal.
Employer Takeaway. While the plan and insurer ultimately prevailed in the Tyll case, litigation such as this can likely be avoided by including plain and clear language in the plan document granting “discretionary authority” for the interpretation of plan provisions and for claims review.