In a recent decision from the Southern District of New York in a case concerning a dispute over the denial of long-term disability (LTD) benefits, a District Court judge held that the LTD insurer had failed to establish special circumstances warranting an extension of the time frame for deciding the claimant’s appeal during the administrative review process. The Court determined that this constituted a violation of the claims processing regulations under ERISA, thereby warranting a de novo review of the insurer’s decision rather than the arbitrary and capricious standard of review that otherwise would apply.
The case, Salisbury v. Prudential Insurance Co. (Dkt. 15-cv-9799, S.D.N.Y.), involves a claim by an employee for LTD benefits under an employer-sponsored ERISA benefit plan. LTD benefits were provided through a group insurance policy issued by Prudential, who served as the claims administrator. After Prudential initially denied the employee’s claim for LTD benefits, the employee appealed the decision with Prudential, as claimants generally must exhaust their administrative remedies prior to initiating litigation. Under the existing U.S. Department of Labor (DOL) claim regulations, Prudential had 45 days to issue a decision on the appeal.
The claims regulations provide that an administrator may request a single 45-day extension if the administrator determines that special circumstances require such an extension, and also provides a written notice to the claimant describing these special circumstances and the date by which it expects to render the determination on review. In this case, prior to the end of the initial 45-day period, Prudential provided written notice to the employee stating that it was extending the time to make its appellate decision, noting that the additional time was “required to allow for review of the information in [the claimant’s ] file which remains under physician and vocational review.” The letter gave the new deadline for its decision. Before the extended time period had run, however, the employee filed suit, challenging Prudential’s denial of her LTD benefits and claiming that the requested extension was improper. Prudential subsequently issued its decision on appeal within the extended time frame, upholding the denial.
Because the parties disputed the standard of review to be applied by the Court, Prudential filed a motion to set the standard of review. The court first held that the Plan documents expressly vested Prudential with the discretion to decide LTD benefit claims, which typically would trigger application of an arbitrary and capricious standard of review.
However, the plaintiff-employee argued that de novo review was warranted because Prudential’s processing of her claim violated the DOL regulation regarding extensions of time. The Court agreed. Finding no case law providing insight into the meaning of “special circumstances” under the regulation, the Court looked to the DOL’s preamble to the regulations for guidance. The Court determined that Prudential’s stated reason for the extension—the need for physician and vocational review—would exist in virtually every appeal of a denial of disability benefits, and thus could not constitute a valid special circumstance.
Prudential had stated no other unusual factors about the claim that would justify the extension. Although Prudential argued that the claim file was voluminous, this reason had not been mentioned in the statement provided to the claimant so the Court refused to consider it. Further, citing to the preamble, the Court also noted that an extension is not automatic, and can only be imposed for reasons beyond the control of the plan—which would not include delays caused by cyclical or seasonal fluctuations in claim volume.
The Salisbury Court relied heavily on the Second Circuit’s decision in Halo v. Yale Health Plan, 819 F.3d 42 (2d Cir. 2016), which the Court raised sua sponte as it had not been briefed by either party. In Halo, the Second Circuit rejected the “substantial compliance” rule – which provides that only substantial compliance with the ERISA claim regulations is required. Halo held that strict compliance is necessary, and determined that any violation of the claims procedure regulations results in a de novo standard of review. Halo created an exception to this rule, providing that the plan can preserve deferential review if it proves that it has otherwise established procedures in full conforming with the regulation and can show that its failure to comply with the claims-procedure regulation in the process of a particular claim was inadvertent and harmless. The Court determined that this limited exception did not apply to Prudential, stating that because the insurer had purposefully sought the extension and provided the inadequate grounds for doing so, the violation could not be deemed inadvertent.
This decision is of concern not only because of its very strict reading of Halo and the claims regulations, but also because the Court rendered its decision without giving either side the opportunity to submit additional briefs as to the applicability of Halo. It should be noted that there are some other decisions within the Second Circuit that do not interpret Halo as strictly as Salisbury does, and that courts in other circuits have declined to follow Halo.
Halo and decisions applying it are also significant because the DOL recently issued new claim regulations impose a strict compliance rule very much like the Halo rule. These new regulations will govern claims filed after January 1, 2018. Thus, Halo and now Salisbury may be a harbinger of future litigation in this area.