Many employers know that one benefit to an ERISA plan is the standard of review available when the participant brings a lawsuit for benefits under the plan. If the plan documents give the plan administrator discretion to decide claims, then the court will review the exercise of the plan administrator’s discretion under an arbitrary and capricious standard. Under that standard, the plan administrator’s decision will be upheld if the decision is supported by any reasonable interpretation of the plan. If the review standard is not arbitrary and capricious, then the court can determine for itself the most reasonable interpretation of the plan in deciding the claim. Because of that deference, plan administrators who can take advantage of the arbitrary and capricious standard are more likely to win lawsuits challenging their decisions.
Unlike the situation with retirement plans where employers typically have formal plan documents, the documentation associated with an employer’s health and welfare plan is often less formal. Employers may rely on their insurance company or third party administrator to provide the documents describing the welfare plan, such as medical, dental, life insurance or long term disability. If the plan is provided under an insurance contract, the insurer will often prepare a certificate of coverage. That certificate of coverage frequently does not contain all the provisions that an employer might like a plan document to contain. Among the missing provisions is sometimes a statement of the arbitrary and capricious standard of review.
Employers will sometimes adopt a “wrap” plan document, which is a plan document that wraps around underlying contracts and policies from an insurance company or third party administrator. Sometimes the wrap document applies to multiple benefits, creating a single plan with a single plan number that allows the employer to file a single Form 5500. Sometimes it is a document that wraps only around a single benefit.
A recent district court decision in Ohio considered the situation of a denial of accidental death and dismemberment (AD&D) benefits to beneficiaries of an employee who had died following a single car accident. Toxicology reports had shown a blood alcohol level in the driver well above the legal limit, and the insurance carrier denied AD&D coverage based on an exclusion for accidents occurring while operating a motor vehicle involving the illegal use of alcohol or controlled substances. The AD&D plan booklet did not grant discretion to the plan administrator or the insurance carrier to decide claims. However, the employer had adopted a wrap document that did contain such discretion. In addition, the summary plan description noted that the employer had discretion to decide claims.
The court concluded that the wrap document and the plan booklet together constituted the plan document so the grant of discretion applied to the AD&D claim denial. The court also said that because a summary plan description is supposed to describe the plan, the statement in the SPD about the grant of discretion was not sufficient to provide the discretion. The court then upheld the decision denying the AD&D benefits, finding that the insurance company’s interpretation of the alcohol exclusion was reasonable.
The case highlights the importance of the abuse of discretion standard and reminds employers that it should check its plan documents to make sure they contain the appropriate discretionary language. If the documents provided by the insurance company do not contain that language, the employer should consider adopting a wrap plan document to add that provision and any other appropriate provisions missing from the insurance company documents.