The Second Circuit Court of Appeals recently held that claim fiduciaries must strictly comply with ERISA claim regulations or lose the deferential standard of review, as we have discussed in previous posts: Second Circuit rejects “substantial compliance” rule, Insurer’s Failure to Establish “Special Circumstances” for Extension of Time to Decide LTD Appeal Warrants De Novo Review, and District of Connecticut Rules that Violations of Claims Procedure Regulations Result in Loss of Discretion.
While other courts have not applied the same strict level of scrutiny to the claims regulations as Halo and its progeny, the Ninth Circuit recently held that a procedural violation in the claims-handling process may warrant de novo review if it resulted in substantive harm to the claimant. In Smith v. Reliance Standard Life Ins. Co., Dkt. # No. 16-15319 (9th Cir., March 16, 2017), the Ninth Circuit Court of Appeals vacated a district court’s order in favor of the insurer on a plan participant’s claims for short- and long-term disability benefits, remanding the case back to the district court for further consideration.
In that case, Reliance had denied plaintiff Smith’s claims for both short-term and long-term disability benefits on the ground that he had a pre-existing condition that rendered him ineligible. Smith brought suit. Applying an abuse of discretion (arbitrary and capricious) standard of review, the district court had affirmed Reliance’s denial decisions.
On appeal, as to the claim for long-term disability benefits, the Ninth Circuit vacated the decision below based solely on Reliance’s failure to issue its denial determination within the 90-day time limit imposed by ERISA’s claim regulations. The appeals court stated that, while Reliance’s failure to comply with ERISA’s procedural requirements could not on its own justify an award of benefits under the LTD policy, it might alter the standard of review, citing to earlier Ninth Circuit cases (it did not reference Halo). The Ninth Circuit thus directed the district court on remand to determine whether the procedural violation caused Smith substantive harm such that de novo review of Reliance’s decision would be appropriate. Absent a finding of substantive harm, the district court should apply an abuse of discretion standard, while according the procedural violation appropriate weight. (As to the STD benefit claim, the Ninth Circuit noted that Reliance had a structural conflict of interest which, while it would not alter the discretionary standard of review as to that claim, needed to be evaluated by the district court as a factor in determining whether there was an abuse of discretion.)
Smith continues the trend of plaintiffs increasingly using alleged procedural violations in the claims handling process to obtain a more favorable standard of review, additional discovery, and/or the opportunity to supplement the administrative record on remand. Moreover, courts appear increasingly willing to consider these arguments. Particularly in light of the issuance of the new claims regulations for disability claims, we can expect that litigation over procedural issues, as opposed to substantive matters, will continue to increase.