Court of Appeals Finds Sun Life Acted Arbitrarily and Capriciously

Sherry DeLisle continued working after her car crashes in 1998 and 2000. She suffered spinal and closed head injuries.  Her employer, Krandall & Sons, fired her on April 17, 2002, stating that “she was not doing her job.”  Eight months later, DeLisle filed for long-term disability benefits with Sun Life, the insurer of Krandall's disability plan. She submitted medical records and statements of five treating physicians. She listed April 17, 2002, as her date of disability.

The Social Security Administration determined that DeLisle was eligible for disability benefits effective April 17, 2002.  Nonetheless, Sun Life denied her claim and upheld its decision in an internal appeal.  The company found that she was no “actively at work” under the policy when her claimed disability started.  DeLisle filed suit in federal court.  The district judge found that Sun Life’s decision was arbitrary and capricious and ordered the company to determine whether DeLisle was in fact disabled on April 17, 2002.


On remand, Sun Life reviewed DeLisle’s extensive medical evidence. Sun Life sent DeLisle’s records out for review by a clinical neuropsychologist, a psychiatrist, an orthopedist, and a rehabilitation counselor. It denied her claim again, stating that the medical evidence did “not document the presence of conditions physical, psychological, or cognitive in nature of such severity that [DeLisle] could not continue to perform her occupation on April 17, 2002 or thereafter…” 


DeLisle appealed again, and Sun Life sent her records to three more records-reviewers (another neuropsychologist, another psychiatrist, and an orthopedic surgeon).  Sun Life upheld its denial of



DeLisle again sued Sun Life.  The district court granted her motion for judgment on the administrative record, finding that Sun Life’s denial of benefits was arbitrary and capricious. The district court sent DeLisle’s claim back to Sun Life to determine the amount of her benefits and ordered Sun Life to pay DeLisle's attorney’s fees.


On appeal, the Sixth Circuit upheld the judgment of the lower court. The Sixth Circuit ruled that:


-Sun Life acted under a conflict of interest as claims decision-maker and payor of benefits. As such, the company had a “clear incentive” to find consultants who are “inclined to find” that claimants are not disabled. The Court pointed out that nearly all of the records-reviewers chosen by Sun Life were under regular contract with the company. 


-Sun Life’s in-house attorney told at least some of the records-reviewers that DeLisle had been “terminated for cause.” However, the only information communicated to Sun Life by Krandall was that DeLisle was fired “because she was not doing her job.” The assertion that DeLisle was terminated “for cause” gave the records-reviewers incomplete and potentially prejudicial information. The improper communications justified the court “giving more weight” to the conflict of interest.


-The Social Security disability determination was “far from meaningless.” The failure of Sun Life to mention DeLisle’s Social Security award, especially when the policy required her to apply for Social Security disability benefits, was not lost on the court: “Sun Life’s silence here does not make its denial arbitrary per se, but is among those ‘serious concerns’ that, ‘taken with some degree of conflicting interests,’ provide a proper basis for concluding that the administrator abused its discretion.”


-After reviewing the quality and quantity of the medical evidence, the court found that “the entirety of the medical evidence available to Sun Life was not reviewed in a ‘deliberate’ or ‘principled’ fashion, which is a factor suggesting that Sun Life’s ultimate determination was arbitary.”


-The fact that DeLisle worked for two weeks after leaving her employer and listed “lack of work” as her reason for leaving her employer did not amount to persuasive evidence that she was able to complete the duties of her job on April 17, 2002.


For these and other reasons, the Sixth Circuit agreed with the district court and concluded that Sun Life had acted arbitrarily and capriciously.


The case is DeLisle v. Sun Life Assurance Co. of Canada, 2009 U.S. App. LEXIS 4251 (6th Cir. March 4, 2009).

Citing ERISA Preemption, Sixth Circuit Dismisses State-Law Claims

The plaintiff, Simcha-Yitzchak Lerner, participated in the long-term disability plan of his employer, SDRC.  After EDS acquired SDRC, Lerner continued to participate in the EDS disability plan.  Continental Casualty Co. insured the EDS plan.  Lerner contended that EDS officials told him that its plan and the SDRC plan provided the same benefits. 

After having stroke-like episodes and chronic headaches, Lerner applied for disability benefits under the EDS plan. After failing to receive them, he filed suit against EDS and Continental. He asserted a claim against Continental for unpaid ERISA benefits and state-law claims against EDS for breach of contract for failing to pay the same benefits available under the SDRC plan; fraudulent misrepresentation by telling him that he would not lose coverage afforded by the SDRC plan; and innocent misrepresentation by telling him that his benefits would not be affected by the EDS acquisition.


The district court dismissed the three state-law claim against EDS, holding that those claims essentially sought “recovery of an ERISA plan benefit.”  The district court thus dismissed EDS as a defendant.  Lerner voluntarily dismissed his ERISA claim against Continental after settling his claim for disability benefits and appealed the dismissal of the state-law claims against EDS. 


The Sixth Circuit affirmed the dismissal of the state-law claims. The Court set forth its framework for evaluating ERISA preemption:

ERISA broadly preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan."  29 U.S.C. § 1144(a).  However, as we noted in Penny/Ohlmann/Nieman, Inc. (PONI) v. Miami Valley Pension Corp., 399 F.3d 692, 697 (6th Cir. 2005), "[T]he Supreme Court has narrowed the preemptive scope of ERISA, moving away from the broadest meaning of the provision."  Instead, the Court now looks "to the objectives of ERISA to guide its preemption decisions."  Id. at 698.  "Thus, ERISA preempts state laws that (1) 'mandate employee benefit structures or their administration:' (2) provide 'alternate enforcement mechanisms;' or (3) 'bind employers or plan administrators to particular choices or preclude uniform administrative practice, thereby functioning as a regulation of an ERISA plan itself.'"  Id.  ERISA does not, however, preempt "traditional state-based laws of general applicability that do not implicate the relations among the traditional ERISA plan entities, including the principals, the employer, the plan, the plan fiduciaries, and the beneficiaries."  Id. (quoting LeBlanc v. Cahill, 153 F.3d 134, 147 (4th Cir. 1998)).


Phrased differently, "[i]t is not the label placed on a state law claim that determines whether it is preempted, but whether in essence such a claim is for the recovery of an ERISA plan benefit." Id. (quoting Cromwell v. Equicor-Equitable HCA Corp., 944 F.2d 1272, 1276 (6th Cir. 1991)).  Because "virtually all state law claims relating to [*6] an employee benefit plan are preempted by ERISA," Cromwell, 944 F.2d at 1276 (emphasis added), we must determine whether Lerner's claims against EDS "relate to" the employee benefit plan.  See Ramsey v. Formica Corp., 398 F.3d 421, 424 (6th Cir. 2005).  "To do that, we consider the kind of relief that [the plaintiff] seek[s], and its relation to the . . . plan."  Id.

The Sixth Circuit rejected Lerner’s arguments that his state-law claims against EDS were based not on Continental’s denial of long-term disability benefits, but on EDS’s alleged failure to make sure that his SDRC benefits were not diminished in the corporate transition. The Court pointed out that Lerner had specifically pled in his state-law claims that his damages included “the loss of disability insurance benefits (monthly benefit payments, return to work benefits, and rehabilitation benefits.)” In the view of the Court, “Lerner has thus chosen to seek payment of the disability insurance benefits themselves, not merely damages in an amount equal to those benefits.”  Therefore, the Court said, “the state-law claims against EDS for breach of contract, fraudulent misrepresentation, and innocent misrepresentation ‘relate to’ an ERISA benefit plan and are preempted by that federal statute.” 


The case is Lerner v. Electronic Data Systems Corp., 2009 U.S. App. LEXIS 4922 (6th Cir. March 9, 2009).

Ninth Circuit Shoots Down Claim for Copying Charges

Mitchell Sgro applied for disability benefits from MetLife, which decided benefit claims for his employer’s ERISA plan.  Sgro asserted that MetLife refused to evaluate­ his claim because he did not send copies of medical records.  Sgro eventually paid $412 for the copies.  MetLife denied his claim after receiving them.


Sgro sued his employer and MetLife in a California federal court, asserting a variety of state-law and federal causes of action.  He sought unpaid disability benefits, reimbursement of copy charges, an injunction ordering the defendants to pay copying charges in the future, and other relief.  The federal district court dismissed his state-law claims with prejudice and his federal claims without prejudice.  The parties then settled the claims for unpaid disability benefits, but Sgro pursued his other claims on appeal. 


Sgro argued that a California regulation (Cal. Code Regs. tit. 10, § 2695.11(g), implementing Cal. Ins. Code § 10123.131) required the defendants to reimburse him for copies of medical records.  The Ninth Circuit disagreed.  The Court held that ERISA preempted the California regulation, as it related to an employee benefit plan.  The Court ruled that the regulation was not “saved” from ERISA preemption under the test set forth in Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003).  While the regulation satisfied the first prong of the test (because it was “specifically directed toward” the insurance industry), the Court concluded that the regulation did not satisfy the second prong; that is, it did not substantially affect the risk pooling arrangement between the insurer and insured:

The regulation doesn't require insurers to insure against additional risks. Cf. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 730, 758, 105 S. Ct. 2380, 85 L. Ed. 2d 728 (1985) (state law that requires health insurers to insure against mental health problems "regulates insurance").  Nor does the regulation require insurers to offer their insureds additional benefits in the event that the insureds take ill.  Cf. Kentucky Ass'n, 538 U.S. at 338 (state law that requires health insurers to permit their insureds to see "any willing provider" in the state "regulates insurance").  Nor does the regulation substantially affect the likelihood that a disputed claim will ultimately be deemed valid.  Cf. Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 361, 122 S. Ct. 2151, 153 L. Ed. 2d 375 (2002) (state law requiring HMOs to offer participants the option of having an independent physician review a denial of coverage "regulates insurance"); UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 364, 119 S. Ct. 1380, 143 L. Ed. 2d 462 (1999) (state law requiring insurers to accept late-filed claims unless the delay prejudiced them "regulates insurance").


There is one way that the California regulation could affect insurers' risks: By requiring insurers to pay copying costs, the regulation does make it slightly easier for insureds to file claims.  If that causes more insureds to file claims, and if some of those additional claims are meritorious, then the regulation will cause insurers to pay more benefits than they otherwise would absent the regulation.  But this possibility is too remote and speculative to "substantially" affect the risk pooling arrangement between insurers and their insureds.  Kentucky Ass'n, 538 U.S. at 342. 

The Ninth Circuit also rejected the position that the defendants violated the ERISA claims procedures (29 C.F.R. § 2560.503-1) by “requir[ing] payment of a fee or cost as a condition to making a claim.”  The Court explained that the copy charges were not a “condition” of making a claim:

The plan merely required Sgro to provide documentation, which is quite different from "condition[ing]" his application on a payment. A "condition" is something that's required of every application; the cost of providing documents, by contrast, depends on decisions made by the beneficiary and could be zero in some cases. For example, if Sgro had copies of the documents on hand at the time he applied for benefits, he could have submitted those copies; or, if his doctors were willing to make copies for him for free, he could have submitted those. In either case, he would have avoided any additional cost. So photocopying costs weren't a "condition" for Sgro to make a claim.

Sgro's reading of the regulation would require plan administrators to pay for a number of other expenses that are typically borne by beneficiaries. To apply for benefits, a claimant must spend time putting together his application or pay someone else to do so; he may require additional medical tests; if he doesn't speak English, he'll need a translator; he may need postage to mail in his application. All these are costs incurred in claiming benefits, but none is a "condition" of making a claim. Nothing in this regulation forbids defendants from requiring Sgro to provide, at his own expense, the documents needed to prove his disability. We therefore affirm the dismissal of Sgro's claim that defendants violated this regulation. 

The Court also addressed Sgro’s claim under 29 U.S.C. § 1132(c)(1) for failure to provide claims materials that he requested.  He alleged that that the defendants did not provide a complete copy of his claim file (including “claim activity records and investigation notes”).  The Court upheld the dismissal of this claim as directed to MetLife, since MetLife was not the plan administrator.  As the Court held, “Even if Sgro did ask MetLife for the records, that company can’t be liable under section 1132(c)(1).  That section only gives Sgro a remedy against a plan ‘administrator,’ and MetLife isn’t the plan administrator.”  The court ruled that Sgro would be allowed to amend his complaint, if he could do so in good faith, to allege that he had requested the claims materials from the plan administrator (the employer). 


The case is Sgro v. Danone Waters of North America, Inc., 2008 U.S. App. LEXIS 13973 (9th Cir. Jul. 2, 2008).

Sixth Circuit: IME Results Doom Plaintiff's Disability Claim

In administering disability claims, ERISA plans often require claimants to undergo examination by doctors selected by the plans.  Even when a claimant’s treating physicians concur that he or she is totally disabled, the plans commonly seek opinions from an examining physicians regarding the claimant’s condition, prognosis, and impairment.  Many claims are denied based largely, if not exclusively, on the opinions of examining physicians.  It is common for claimants to challenge reliance on “independent medical evaluations” by plans and insurance carriers.  After all, examining physicians often spend very little time with a claimant, have not seen the affects of the claimant’s condition over time, and arguably have less ability to assess the claimant’s credibility.  What’s more, there are often allegations that the examining physician may be biased in favor of plans and carriers, which typically pay the examining physician’s bill. 


The bottom line is that the use of examining physicians can seriously affect the outcome of an ERISA claim.  Indeed, in Lupo v. Daimlerchrysler Corp., 2008 U.S. App. LEXIS 13658 (6th Cir. Jun. 24, 2008), the use of an examining physician became entirely conclusive.  Michael Lupo sought disability benefits under his employer's pension plan, which contained this eligibility language:

The medical opinions of the physician or physicians shall resolve the issue as to the individual's condition.  Provided they are consistent, such opinions shall be binding upon the Employee Benefits Committee which, following receipt thereof, shall render its findings in accordance with such opinions.  If the physicians shall disagree over the issue of whether the Employee is Permanently and Totally Disabled or as to the duration of such condition, the matter shall be submitted to an independent medical examiner.  Such independent medical examiner shall render his opinion which shall be binding upon the Employee Benefits Committee.  Following its receipt thereof, the Employee Benefits Committee shall render its findings in accordance with such opinion.   

Lupo’s treating physician affirmed that he was unable to work under the standards for Social Security total disability.  The opinion indicates that the defendant’s physician (presumably a doctor reviewing medical records, although the opinion does not say) did not agree with the treating physician’s finding of disability.  Under the plan language, the case thus came down to the opinion of the examining physician.  Although the examining physician found that Lupo was "likely suffering from a severe persistent mental illness, which does render him incapacitated and unable to work," the physician concluded that Lupo had not attempted to receive full treatment necessary to determine his disability status. 


Lupo sued pro se for disability benefits under the plan.  In affirming the federal district court’s ruling in favor of the plan, the Sixth Circuit found that the plan was bound by the opinion of the examining physician.  The court thus concluded that the plan had properly denied the disability benefits.  There was apparently no allegation that the examining physician’s conclusions were biased in favor of the plan.    


The plan language seems quite harsh, as it allowed the plan to rely solely on the opinion of the examining physician without consideration of the overall circumstances or an analysis of the varying opinions given by the physicians.  The opinions of the examining physician simply trumped the opinion of the treating physician. 


It is worth stressing that even the examining physician found that Lupo was unable to work.  The examining physician instead opined that Lupo had not received full medical care.  A strong argument can be made that Lupo is entitled to benefits based on the plan language and the finding of disability by the examining physician.  There is no discussion of whether the plan requires “appropriate care,” as many plans do, and whether Lupo had in fact sought or received such care.  It appears that the unrepresented plaintiff did not raise the issue.


Prudential Policy Language Insufficient to Trigger Abuse-of-Discretion Review

In ERISA benefit litigation, the selection of the judicial standard of review is often a hotly contested issue.  Insurance carriers push for the abuse-of-discretion standard, arguing that it requires courts to give a significant degree of deference to their decisions to deny benefits.  Where possible, claimants argue for the de novo standard, which does not afford deference to the denials of benefits. 


In the seminal case of Firestone Tire & Rubber Co v. Bruch, 489 U.S. 101 (1989), the Supreme Court announced that lower courts should review ERISA denials under a de novo standard unless the plan conferred “discretionary authority” on the plan administrator.  If discretionary authority is properly conferred, then the courts are to pursue some version of the abuse-of-discretion approach.  Litigation has focused on whether plan language grants discretionary authority sufficient to trigger the abuse-of-discretion standard.

Language commonly used by Prudential in its disability policies is no stranger to dispute.  The language says that a claimant is entitled to benefits “when Prudential determines” that he or she is eligible.  Prudential asserts that this language meets the Firestone test for vesting discretionary authority. 


In the recent case of Woods v. Prudential Ins. Co. of America, 2008 U.S. LEXIS 12423 (4th Cir. Jun. 11, 2008), the Fourth Circuit held otherwise.  Addressing the “when Prudential determines” language, the Court held that “[a]lthough the Plan’s language vests authority in Prudential, it does not create any discretionary authority, as required by Firestone.”  The Court added that “discretionary authority is not conferred ‘by the mere fact that a plan requires a determination of eligibility or entitlement by the administrator.’”  (quoting Gallagher v. Reliance Std. Life Ins. Co., 305 F.3d 264 (4th Cir. 2002).  The Court continued: 

In other words, almost all ERISA plans designate an administrator who, in order to carry out its duties under the plan, must determine whether a participant is eligible for benefits.  Yet this authority to make determinations does not carry with it the requisite discretion under Firestone unless the plan so provides.  Firestone itself is based on this distinction.  That decision, grounded in common law trust principles, drew a contrast between trustees who had no discretion but who, of course, had authority to manage a trust, and trustees who had been granted discretion, in addition to their authority. See, e.g., Firestone, 489 U.S. at 111 ("where discretion is conferred upon the trustee," abuse-of-discretion review is appropriate); id. (abuse-of-discretion review is appropriate when "discretion [is] vested in [trustees] by the instrument under which they act"); see also Haley v. Paul Revere Life Ins. Co., 77 F.3d 84, 88 (4th Cir. 1996) (noting difference between authority/duty to pay benefits and grant of discretion over benefit determinations). This distinction is important because ERISA plans are to be construed "in accordance with the reasonable expectations of the insured" when ambiguous, Gallagher, 305 F.3d at 269, and are to "enable plan beneficiaries to learn their rights and obligations at any time" by "reliance on the face of written plan documents," Blackshear [v. Reliance Std. Life Ins. Co.], 509 F.3d at 643 (internal citations and alteration omitted).  A plan which simply conveys authority to an administrator creates the expectation only that such authority will be exercised, not that the administrator will enjoy wide discretion in wielding its authority as well as freedom from searching judicial scrutiny.

In reaching its conclusion, the Fourth Circuit agreed with the Seventh Circuit’s decision in Herzberger v. Standard Ins. Co., 205 F.3d 327, 332 (7th Cir. 2000).  There, the Court held: 

We hold that the mere fact that a plan requires a determination of eligibility or entitlement by the administrator . . . does not give the employee adequate notice that the plan administrator is to make a judgment largely insulated from judicial review by reason of being discretionary. Obviously a plan will not—could not, consistent with its fiduciary obligation to the other participants—pay benefits without first making a determination that the applicant was entitled to them.  The statement of this truism in the  plan document implies nothing one way or the other about the scope of judicial review of his determination, any more than our statement that a district court "determined" this or that telegraphs the scope of our judicial review of that determination.

Accordingly, the Fourth Circuit reversed the district court, which had applied a modified abuse of discretion standard, and remanded the case for evaluation under the de novo standard.  Read the full opinion here.