Managing a disability benefits dispute in the United States can be a challenging endeavor for claimants, employers, plan administrators and insurance providers alike. One area that all involved must consider is whether a claim for disability benefits will be controlled by the Employee Retirement Income Security Act of 1974 (ERISA).
What is ERISA and does it apply?
ERISA is a federal law which sets minimum standards for pension and health plans in the private sector and which provide benefits (including in some instances disability insurance) to individuals protected under those plans. ERISA regulates the benefits you receive through your private employer, such as disability insurance but does not apply to privately purchased, individual insurance policies or benefits. The main purpose of ERISA is to protect the interests of employees (and their beneficiaries) who are enrolled in "employee benefit plans," and to ensure that employees receive those benefits that have been promised to them by their employers. Therefore, as a general guide, group PA schemes purchased by employers for the benefit of their employees are likely to be covered by ERISA.
A threshold issue that often comes up in ERISA disputes is whether ERISA is implicated in the first place. These disputes concern what is commonly referred to as "ERISA preemption." If ERISA is implicated in a given case, state law claims will be "preempted", which in the insurance context will mean that the ERISA rules will govern the dispute between individuals and their insurers rather than general state law.
To ascertain whether ERISA applies, reference first should be made to 29 U.S. Code §1002, which defines an "employee welfare benefit plan" and a "welfare plan" as: "…any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer ... for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, ... benefits in the event of sickness, accident, disability, death or unemployment." There are also certain limitations set out in that section.
Care should be taken to consider whether a policy will be governed by ERISA because this law will impact how a dispute will be resolved. Whether a plan satisfies the criteria is an objective test and is not dependent upon certain labels or formalities, although the existence of these is obviously a good guide.
It should be noted that the provisions of ERISA are specifically applicable to those fiduciaries with financial responsibility for the administration of an "employee benefit plan" providing disability and other related benefits. This would include Underwriters and any appointed claims handlers.
Why is understanding the role of ERISA in litigation regarding disability benefits important?
For one, the process for resolution of the claim is impacted if ERISA controls as opposed to state law. Rather than having the right to immediately pursue litigation, ERISA claimants must follow the grievance process outlined in their plan.
Secondly, the remedies and relief available under ERISA are also different as compared to those situations where benefits are reviewed through the lens of state law claims (i.e., breach of contract).
Importantly, in ERISA disputes regarding the availability of benefits, claimants are generally limited to recovery of the value of benefits provided in the plan or a ruling specifying what is actually covered. Therefore, the plan participant cannot recover extra-contractual, compensatory, or punitive/bad faith damages under ERISA – remedies that are only typically available under state law. Thus if ERISA applies, the common threat of claimants that an insurers' exposure will be inflated exponentially by reference to these additional potential damages should a carrier refuse to settle the claim is removed.
However, it should be noted that it is possible that a claimant in an ERISA dispute may be entitled to a recovery of some attorneys' fees where the litigant can demonstrate "some degree of success on the merits.” This is of course, contrary, to the typical American rule which does not allow for the recovery of attorneys' fees by successful claimants.
From an administration perspective, the ERISA rules include requirements for the communication with participants and processing of benefit claims, in particular including:
- Plan information including important information about plan features and funding;
- A timeline for when a claimant may file a claim;
- A timeline for a decision upon the claim;
- Rights of the claimant when a claim is denied (e.g. an appeals process);
- Details about a specific grievance and appeals process for claimants (e.g. written internal appeals process where the claimant makes a full evidentiary submission for a further review by the claims handler/administrator);
- Provision of the right to sue for benefits after the grievance processes have been exhausted. As ERISA is a federal law, any litigation will be venued in Federal court in the most convenient location meaning: (1) the district where the plan is administered; (2) where the breach took place; or (3) where the defendant resides or may be found.
Failure to adhere to specific plan administration requirements under ERISA could give rise to costly litigation.
When a disability benefits dispute governed by ERISA does give rise to litigation, there are typically a handful of issues which arise, including the standard of review to be applied to the plan administrator's decision regarding the availability of benefits. Generally speaking, Courts will give a new or fresh look to decisions regarding the availability of benefits under the contractual terms and conditions of insured and self-insured plans. That said, where the Plan includes specific, explicit language reserving the administrator’s (the appointed claims handler in the insurance context) discretion to determine benefits and interpret policy terms, the court may apply a deferential, abuse of discretion standard, in which the court will determine whether the administrator’s conduct was arbitrary and capricious. In layman's terms this means that as long as the administrator's decision was reasonable in the context of the benefit plan's terms and conditions, and was one which was not absurd or otherwise procedurally inappropriate, the Court will likely uphold the decision regarding benefits.
As a consequence Underwriters would be well advised to include language in group PA policies that expressly provide for significant deference to the plan administrators to make determinations regarding the availability of benefits.
The general point is that Underwriters should be mindful as to the benefits and drawbacks of arguing that ERISA applies to a claim dispute. In some cases, Underwriters may stand to benefit in arguing that ERISA applies to govern the determination of the availability of benefits. In other circumstances, perhaps where state law is particularly favorable and state law claims have not been clearly "preempted," Underwriters may be best suited to advocate that a given policy is not an "employee welfare benefit plan" and thus ERISA is inapplicable. This is naturally a position to consider depending upon the facts of each case.
This note does not and cannot touch on all of the considerations and issues that can and do arise when evaluating whether ERISA may be implicated in determining the availability of disability benefits. In summary, to the extent that Underwriters are subscribing to US PA policies and those insurance products can be said to be an "employee welfare benefit plan" or perhaps part of a broader group plan, it is important that Underwriters are generally aware of the potential applicability of ERISA and how this may impact the assessment of coverage and the available remedies.