Two Opinions Demonstrate Importance of Prudent Administrative Procedures and Substantive Decisions in Responding to ERISA Benefit Claims

One of the most common and important tasks for ERISA plan fiduciaries is how to appropriately respond to plan participant claims for benefits. When the decision is made to deny benefits to claimants, the importance of having in place prudent protocols and procedures is magnified, and closely following those procedures on an administrative and substantive basis could make a key difference, particularly where a participant challenges a denial of benefits in court. Two recent cases illustrate - in differing ways - how plan fiduciaries' missteps in dealing with benefit claims led to losses in court, and why implementation best practices are essential to avoid exposure to denial of benefit litigation and the associated costs.

First, in Rizzo v. First Reliance Standard Life Ins. Co., on October 23, 2019, the United States District Court for the District of New Jersey found that Defendant First Reliance Standard Life Insurance ("First Reliance") improperly denied the plaintiff approximately $190,000 in benefits under First Reliance's group life insurance policy. But this result could have been avoided if not for administrative and substantive errors First Reliance made in denying benefits to the claimant.

The Plaintiff in Rizzo, was the wife of a former Barnes and Noble Assistant Store Manager. After suffering from shortness of breath and dizziness, Mr. Rizzo was diagnosed with chest pain, shortness of breath, palpitations, dizziness, edema, diabetes type II, cardiomyopathy, hypertension, obesity, and lymphedema. Rizzo v. First Reliance Standard Life Ins. Co., No.: 17-cv-00745 (PGS)(DEA), 2019 WL 5420548 (D.N.J. October 23, 2019). Because of these ailments, First Reliance wrote to Mr. Rizzo on March 1, 2013 and informed him he was eligible for group life insurance benefits - specifically the waiver of premium provision ("WOP") in the event of "total disability." Mr. Rizzo's claim for benefits (the WOP application) was denied by the Defendant on October 9, 2013 and pursuant to the terms of that letter, Mr. Rizzo, had 180 days to appeal the denial of benefits. Mr. Rizzo failed to appeal within 180 days and, therefore, First Reliance's position was that the Plaintiff's failure to appeal the denial of benefits within 180 days was dispositive and warranted dismissal of the denial of benefits claim. The Plaintiff rebutted this argument by contending that it was not required to exhaust administrative remedies prior to bringing this lawsuit because the Defendant violated ERISA's 90-day adverse benefit notification requirement.

Whether the Plaintiff had exhausted administrative remedies was of critical importance because, due to ERISA's provision for the administrative review of benefit claim denials, courts have read an exhaustion of administrative remedies requirement into the statute. See Rizzo, 2019 WL 5420548 at *4 citing Berger v. Edgewater Steel Co., 911 F.2d 911, 916 (3d Cir. 1990) (collecting cases). Further, a finding that a claimant failed to exhaust the review procedures provided by an ERISA plan may result in summary judgment dismissal. D'Amico v. CBS Corp., 297 F.3d 287, 293 (3d Cir. 2002). There are notable exceptions to this rule - and one that was most applicable in Rizzo was that where a plan expressly requires exhaustion of administrative remedies but fails to establish or follow claims procedures consistent with the applicable ERISA regulatory requirements -a court will deem claimants to have exhausted their administrative remedies. See Campbell v. Sussex Cty. Fed. Credit Union, 602 F. App'x 71, 75 (3d Cir. 2015).

While First Reliance was wise to assert the exhaustion of administrative remedies affirmative defense, it made a critical error in procedure in deciding to deny benefits - it failed to respond to the original claim for WOP benefits within ERISA's 90-day adverse benefit determination notification requirement. See 29 C.F.R. § 2560.503-1(f)(1)). Indeed, First Reliance waited 203 days to deny the benefits claim. The Court found that because of this delay the Plaintiff's administrative remedy procedure was exhausted. This was an important turning point in the case because if First Reliance had issued its response within ERISA's 90-day period, the litigation would have likely been dismissed because the Plaintiff failed to appeal under the administrative procedure set out in the plan.

The Court then turned to the actual denial of benefit analysis under the arbitrary and capricious standard. The Court followed the arbitrary and capricious standard because under the terms of the plan, First Reliance had discretionary authority to deny benefits to claimants. The arbitrary and capricious standard is deferential, and courts will uphold the decision to deny benefits if it was "reasonable and supported by substantial evidence." See, e.g, Dunn v. Reed Grp., Inc., No. CIV. 08-CV-1632 FLW, 2009 WL 2848662, at *9 (D.N.J. Sept. 2, 2009).

What sets this case apart from others like it is that, even though the arbitrary and capricious standard was followed and this standard is deferential to the plan, the Court found that First Reliance acted arbitrary and capriciously in denying WOP benefits to the plaintiff. Essential to the Court's analysis was that it determined that First Reliance's own Claims Department Administrative Procedures Manual made clear that in determining eligibility for the benefit, First Reliance was required to consider "all of the information in the claim file, including but not limited to: (1) Attending Physician Statement(s) or other completed medical forms; (2) medical records; (3) functional capacity evaluation(s); (4) independent medical examination(s); and (5) other relevant information." According to the Court, First Reliance did not follow this procedure in denying benefits to plaintiff and instead, First Reliance only relied upon the attending physician statement to deny benefits and turned "a blind eye" to other medical information including the other factors called out in its administrative procedures manual.

Because of the errors First Reliance made on both procedural and administrative levels that could have resulted in a dismissal of the case, the Court ordered First Reliance to pay $188,000 to the Plaintiff under its group life insurance policy.

Another recent case illustrates different problems associated with an appropriate response to a claim for benefits. On October 29, 2019 the United States District Court for the Western District of Wisconsin, in the case, Mathews v. The Northwestern Mutual Life Ins. Co., 18-cv-046, 2019 WL 5578333 (W.D. Wis. Oct. 29, 2019) ordered Defendant Northwestern Mutual to award short-term disability benefits to the Plaintiff after it had failed to properly accommodate her and transfer her to a new position that was better suited to her medical history after injuries on the job.

The claimant in Mathews worked at the company Aztalan Engineering in the role of a "Packer and Administrator." Her principal duties included "cleaning and packaging parts, inspecting parts, and performing assembly operations," and the job required "the ability to occasionally lift up to 50 pounds." After suffering injuries on the job associated with her responsibilities, the Plaintiff reported to Aztalan that she was unable (1) to drive to work because of the sedating effects of her medication and (2) to perform the lifting and repetitive tasks required of her job and therefore, sought an accommodation and transfer to a job with less physical labor.

As a supposed accommodation, Aztalan transferred her to the position of "Material Handler." But the listed duties for "Material Handler" were essentially the same as that for Packager & Administrator. Specifically, the Material Handler position's duties included "inspecting parts, cleaning and packaging parts to specifications, and performing assembly operations," and the position required "standing, walking, bending, crouching, or stopping, and occasionally lifting heavy objected weighing up to 50 pounds."

Not surprisingly, because the accommodation did not offer the requested relief and still required the physical movements she had difficulty performing, the Plaintiff was not able to perform the duties of the Material Handler position without accommodations, including the assistance of her coworkers.

Defendant Northwestern Mutual issued a short-term disability insurance plan for employees of Aztalan. In the short-term disability insurance plan (the "STDI Plan") Northwestern Mutual agreed to pay the" benefits provided by the Policy, in accordance with the provisions of the Policy." The STDI Plan did not grant discretion to Northwestern Mutual to construe the terms of the plan or to determine eligibility for benefits. Under the terms of the STDI Plan, Plaintiff submitted her application for STDI benefits to Northwestern Mutual in June 2015. Included with her application was an Employer Statement, identifying her job title as Material Handler and providing the job description of that position. In her application, Mathews stated that her disability prevented her from being able to operate machinery, thread gauge parts, do repetitive motions, lift more than five pounds, reach overhead and push parts on pallets.

Northwestern Mutual concluded, in response to her claim for benefits, that the supposed accommodated position the Plaintiff was performing "did not exist" at Aztalan and this occupation only existed in the general economy under the title of Finishing Inspector "a light level occupation requiring frequent reaching, handling, and fingering." See Matthews, 2019 WL 5578333 at *6. Northwestern Mutual determined that Aztalan had effectively created a new position for Mathews by limiting her duties in certain respects and taking some tasks away from other workers in order to form a job for her. It denied benefits specifically on this basis - that the Plaintiff's occupation as a Packaging/Clean Room and Material Handler is "consistent with a Finishing Inspector, which is considered Light Strength level work" and (2) Mathews' "medical conditions would not have prevented her from performing a light level occupation."

The Court did not agree with Northwestern Mutual' s decision. First, in analyzing whether Northwestern Mutual could deny benefits to plaintiff under the terms of the plan, the Court adopted the de novo standard (not the arbitrary and capricious standard) because it was undisputed that Northwestern Mutual did not have fiduciary discretionary authority to determine eligibility for benefits under the terms of the STDI plan. And, under the de novo standard of review - rather than deferring to the plan's decision, the Court must "mak[e] an independent decision about the employee's entitlement to benefits." Diaz v. Prudential Ins. Co. of Am., 499 F.3d 640, 643 (7th Cir. 2007). Specifically, under the de novo standard, the Court must make its own decisions "on both the legal and factual issues that form the basis of the claim." Id. "What happened before the Plan administrator or ERISA fiduciary is irrelevant."

In applying the de novo standard, the Court concluded that Northwestern Mutual denied benefits under the erroneous premise that the Plaintiff was employed as a "Finishing Inspector" as opposed to a "Material Handler." It emphatically stated that "the undisputed record reflects that her employer refused to accommodate her further by providing a modified job with certain restrictions due to her physical limitations" and "Northwestern Mutual should have defined Mathews' 'Own Occupation' as the Material Handler position." The Court then found plaintiff could not medically perform the abilities of the Material Handler position based upon the administrative record and medical history and ordered Northwestern Mutual to provide benefits to the claimant under the terms of the STDI Plan.

Like the result in Rizzo, missteps by Northwestern Mutual resulted in this unfavorable decision against it. First, because the plan was written in a fashion that did not grant Northwestern Mutual discretionary authority to determine benefit eligibility, the Court followed the de novo standard which is an independent analysis of the administrative record, and therefore, no matter the facts, could conceivably result in a reversal of the plan fiduciary's determination. Second, based upon the facts in Mathews, it was imprudent to respond to the claimant's request for accommodation by replacing her in a position that had virtually the same enumerated responsibilities of her original "Material Handler" position. While the denial of benefits justification rested on the "lighter" physical responsibilities of the perceived "Finishing Inspector" position, the "Finishing Inspector" did not officially exist at the company. Northwestern Mutual would have been better served, to clarify the terms of the "Own Occupation" STDI Plan to account for situations like in Mathews where the employee was not and could not actually perform the listed positions of the accommodated position. This need was especially acute because of the lack of discretion awarded to Northwestern Mutual under the terms of the plan and the ability of the Court to independently analyze the claim for benefits.

In the end, losing or winning a denial of benefits case rests on adopting straight forward administrative and substantive procedures and best practices designed to account for situations like in Rizzo and Matthews. Because the costs of paying out benefits - when the Plan need not necessarily do so at its discretion - can potentially be substantial, ERISA plan administrators should consult with counsel to determine how to effectively implement best practices in responding to participant benefit claims.