May 21, 2019
A few basic truths of ERISA follow. First, when a claim is denied, generally claimants have to appeal that denial to the insurer or other plan fiduciary. If they don’t exhaust their pre-litigation appeal obligations, the court will throw them out when they file suit to recover those benefits. Second, when the claimant does end up in litigation, the court will generally consider only the arguments and evidence the claimant submitted in the pre-litigation appeal process. Thus, the pre-litigation appeal process is critical. The case the claimant can present in court is shaped by, and dependent on, the pre-litigation appeal process.
It’s in light of these realities that Kahane v. UNUM, __ F.3d ___, 2009 U.S. App. LEXIS 6957 (11th Cir. 2009), issued last week, is so troubling. 29 U.S.C. §1132(g)(1) states that a court may, in its discretion, award a reasonable attorney fee and costs to either party in a case to recover ERISA benefits. The trial court ruled that a claimant has no ability to recover fees and costs for the pre-litigation appeal work and the Eleventh Circuit affirmed. The court reasoned that, advisable though it may be, retaining an attorney during the pre-litigation appeal process is not mandatory for a claimant. In addition, the pre-litigation appeal process was not intended to be complex, expensive or time consuming. To provide for the possibility of a fee award in that context could hamper those virtues. Besides, every other Circuit decision to consider the matter had likewise denied the possibility of an attorney fee award for pre-litigation appeal work.
So, here’s the lay of the land in light of Kahane. Before they can file suit, claimants have to appeal the denial of their claims to the insurer or plan administrator who originally denied their claim. And any lawsuit they do file will likely stand or fall based on the quality of the arguments and evidence presented in that pre-litigation review. Those arguments and evidence are usually complex. The appeals are usually being made to persons or companies with inherent, significant conflicts of interest. They are charged with looking out for the interests of the claimants but they also are usually protecting their own bottom line. Those ERISA fiduciaries almost always have granted themselves discretionary authority that effectively insulates them from any searching review by a judge if litigation follows the denial. If anyone needed a knowledgeable lawyer in this situation, these claimants do. If the claimant, against all odds, ends up getting a court to reverse a denial of a claim, will the federal judiciary even allow for the possibility of a court awarding attorney fees and costs associated with the pre-litigation appeal process? No.
Durand v. Hanover Ins. Group, ___ F.3d ___, 2009 U.S. App. LEXIS 5749 (6th Cir. 2009), demonstrates limits to the obligation to exhaust pre-litigation appeals before bringing a suit for wrongly denied ERISA benefits. The case involves a pension plan participant’s challenge to the plan’s method of calculating lump sum benefits. The trial court dismissed the case because the plaintiff failed to exhaust her pre-litigation appeal obligations. The Sixth Circuit reversed.
While exhaustion of pre-litigation appeals is required for ERISA’s run-of-the-mill benefit denial claims, this case holds that challenges to a plan fiduciary’s interpretation of statute or the legality of actions administering the plan do not require the plaintiff to exhaust pre-litigation appeals. Interpretation of statute is purely within the authority of the judiciary. In addition, requiring plaintiffs to ask ERISA plan administrators to ignore the language of the plan terms because they are written in a way that violates the statute is futile. Likewise, to expect plan fiduciaries to judge the legality of their own actions is unreasonable. In these situations, plan participants and beneficiaries may bring their suits directly to federal court without exhausting "administrative" remedies.
The court’s rationale is closely related to the idea that language of a plan document granting discretion to a plan administrator does not insulate that person or entity from plenary, de novo review by a court when a plaintiff challenges the legality of the plan fiduciary’s action or its interpretation of ERISA's legal requirements.