LTD Claim Denial Subject to Stricter Standard of Review Due to Untimely Decision

The Seventh Circuit Court of Appeals, in Fessenden v. Reliance Standard Life Ins. Co., has held that a plan administrator's decision to deny a participant's claim for long-term disability ("LTD") benefits was subject to the de novo standard of review because the administrator failed to comply with ERISA's deadline for issuing a claims decision.

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 "arbitrary and capricious" 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."

ERISA's claims procedure regulations specify the time period in which a plan administrator must make a final decision on a claim. A plan administrator's failure to make a final decision before this deadline can affect the standard of review applied by a court.

Background. The plaintiff in this case stopped working due to fatigue and severe, chronic migraines and then submitted a claim to the plan administrator for LTD benefits. The plan administrator denied the plaintiff's claim. While the parties disagreed as to the exact deadline for the plan's final decision, both agreed that the decision was made after the 90-day deadline required under ERISA.

The plaintiff sued the plan administrator after the deadline but before the final decision, claiming that he qualified for LTD benefits under the plan. The district court dismissed the case in favor of the plan administrator and the plaintiff appealed to the Seventh Circuit.

While the plan administrator acknowledged its untimely final decision, it argued that the Seventh Circuit should excuse its failure to meet the applicable regulatory deadline by applying the doctrine of substantial compliance. The plaintiff disagreed, contending that the substantial compliance doctrine should not apply to the case.

Seventh Circuit. On appeal, the Seventh Circuit refused to apply the substantial compliance doctrine and reversed the district court, holding that the plan administrator had forfeited the arbitrary and capricious standard of review by failing to comply with the deadline set forth in the regulations.

The Seventh Circuit explained that the statutory deadline imposes a "hard stop," and that "in no event" may the deadline be extended beyond a specified number of days. Although the Seventh Circuit noted that the substantial compliance doctrine may apply to other aspects of claims processing, it does not apply to missed deadlines because "substantial compliance with a deadline requiring strict compliance is a contradiction in terms."

In reaching this decision, the Seventh Circuit declined to follow case law from other circuits (i.e., the Third, Ninth and Tenth Circuits) that had previously applied the substantial compliance doctrine to excuse missed regulatory deadlines. As a result, the Seventh Circuit reversed the judgment in favor of the defendant and remanded the case to the district court.