May 22, 2019
According to one U.S. Circuit Court of Appeal, the answer is a resounding "no." In an important decision today from the Seventh Circuit, Judge Frank Easterbrook writes for a unanimous panel in Krolnik v. The Prudential Ins. Co. of America. The trial court ruled that Paul Krolnik was prohibited from introducing affidavits in litigation to support his disability claim. Krolnik also attempted to conduct discovery but the trial court likewise cut him off at the pass. The trial court ruled that ERISA benefit denial cases, even those conducted under a de novo standard of review, simply involve a review of the insurer's actions rather than consideration of all the facts and arguments presented by both sides in litigation. After the court granted Prudential summary judgment, Krolnik appealed.UPDATE: I've place Krolnik in the website library.
Judge Easterbrook is known for his concise, direct and unequivocal writing style and this opinion is no exception. The reference in Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989), to "de novo review" is misleading: "[t]he law Latin could be replace by an English word, such as 'independent.' And the word 'review' simply has to go. For what Firestone requires is not 'review' of any kind; it is an independent decision rather than 'review' that Firestone contemplates."
Comparing the dispute before the court to non-ERISA insurance litigation, the opinion goes on to state, "[a] judge would not dream of forbidding the parties to take discovery, let alone of rejecting affidavits that did not depend on discovery. Evidence is essential if the court is to fulfill its fact-finding function. Just so in ERISA litigation." Where the evidence is conflicting, the court, rather than an insurer or other ERISA plan administrator, is obligated to weigh the evidence and make a final decision about whether the claimant is entitled to benefits.
Summing up, Judge Easterbrook takes pains to be clear:
"All in all, it would be best for judges and lawyers to stop thinking about 'de novo review'--with the implication that the judge is 'reviewing' someone else's action--and start thinking about independent decision, which is what Firestone requires."
This is the first Circuit court I'm aware of to explicitly state that there are no restrictions or limitations on the scope of review a trial court carries out when it undertakes de novo review of an ERISA benefit denial case. There is support for the argument not just in Firestone v. Bruch, as the opinion references, but also in the Court's statements last year in MetLife v. Glenn, 128 S.Ct. 2343 (2008). In that case the Supreme Court held that there are no special evidentiary or procedural rules trial courts are bound to follow in evaluating how an insurer's inherent conflict of interest affects a court's review.
As de novo review becomes more common in ERISA benefit denial cases (states are increasingly banning discretionary authority clauses from insurance policies), Krolnik has the potential to significantly shift the basic framework lawyers and judges have taken for granted in litigating ERISA benefit denial cases. The effect of greater discovery and opportunity to develop and present information in litigation will do two things. It will result in better, more fully informed and accurate decision making by the federal judiciary. And it will make litigating ERISA benefit denial cases more costly in time and money for the parties.
Yesterday the U.S. Court of Appeals for the First Circuit issued its long awaited decision in Denmark v. Liberty Life Ass. Co. The case involves Diane Denmark's assertion that Liberty Life wrongly denied her disability claim. The procedural history is long and torturous. The First Circuit ended up delaying a ruling in the case until MetLife v. Glenn, 128 S.Ct. 2343 (2008), was decided to get the Supreme Court's guidance on how an insurer's conflict of interest affects the standard of review a trial court should utilize in ERISA benefit denial cases.
The First Circuit reversed the trial court's ruling in Liberty Life's favor and remanded the case for additional consideration based on "refinements" Glenn required to First Circuit precedent on the appropriate standard of review for conflicted ERISA plan administrators. The court makes clear that Glenn requires a trial court to take the particular facts of an insurer's structural conflict of interest into account on a case by case basis. "[C]ourts are duty-bound to inquire into what steps a plan administrator has taken to insulate the decisionmaking process against the potentially pernicious effects of structural conflicts." In addition, depending on the facts of the case, the conflict may be so signicant that it justifies a ruling by the court that a claim denial was arbitrary and capricious.
But the most interesting aspect of the decision is its language about what discovery is available to claimants in ERISA benefit denial cases. The opinion acknowledges that discovery may be necessary to gather the information the Supreme Court identifies as relevant in Glenn. But, curiously, the majority opinion makes clear its hostility to the idea that the same scope of discovery ordinarily carried out in other types of civil litigation would be proper to flesh out the conflict of interest issues identified by the Supreme Court. Any discovery directed to conflict of interest in an ERISA benefits case ". . . must be allowed sparingly and, if allowed at all, must be narrowly tailored so as to leave the substantive record essentially undisturbed." This, despite the Supreme Court's statement in Glenn that it contemplates no "special procedural or evidentiary rules" different from other litigation as to how evidence of conflict of interest will be presented. Glenn, 128 S.Ct. at 2351.
The majority opinion then goes on to foretell what district courts in the First Circuit can expect the pre-litigation appeal record to contain by way of information that will make discovery as to conflict unnecessary in future cases. Quite honestly, the penultimate paragraph in Section III of Denmark is simply bizarre. Such soothsaying simply has no place in a judicial opinion. This paragraph is a badly concealed attempt to instruct insurance companies and other conflicted ERISA fiduciaries how they can curtail discovery into facts they would rather not have come to light and that could demonstrate they are ignoring their fiduciary duty of loyalty to ERISA plan participants and beneficiaries.
A concurring opinion from Judge Lipez shares some of my heartburn. That concurrence criticizes the majority opinion for its hasty and unwarranted discussion of complex legal issues that neither party to the litigation briefed or raised on their own. Courts are ". . . far more likely . . . to fashon defective rules, and to assert misguided propositions, which have not been fully thought through . . ." when they stray into territory based on their predilections. The majority opinion's language that discovery must be allowed sparingly is an "unwarranted signal that discovery into the existence of an actual conflict is disfavored." In future cases, First Circuit district courts "should not feel bound by the hostile attitude towards discovery that is improvidently reflected in dicta in the majority opinion."
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.
Earlier this week the Sixth Circuit affirmed that Michigan’s Commissioner of Insurance has the regulatory power to ban discretionary authority clauses and that ERISA does not preempt that action. The case is American Council of Life Insurers v. Ross, 2009 U.S. App. LEXIS 5748, ___ F.3d ___ (6th Cir. 2009).
Ross is important. Say you are about to enter a financial transaction involving a significant amount of your money. You are dealing with someone who knows a lot more about the ins and outs of finance than you do. He asks you to let him insert language in the contract that gives him alone the ability to interpret the terms of that contact and determine whether you and he have performed the obligations under it. He also tells you that if a dispute arises, that same language will allow a court to reverse his decision only if the Judge determines he has been completely unreasonable in his interpretation of the contract or his determination about whether the contract has been performed as required.
Would you agree to do a deal with that person? Of course not. Yet that is what insurance companies do every day with employee benefits. Fortunately, the Sixth Circuit decision makes it clear that the state insurance commissioners in Michigan, Ohio, Kentucky and Tennessee can prohibit these types of overreaching discretionary authority clauses in an insurance contract.