I’ve read hundreds of ERISA cases in the past 15 years. Most are quite pedestrian but some are remarkable for either their goodness or badness. I’m going to occasionally highlight the cases I’ve found most noteworthy for being either righteous or terrible: the hits and the misses. I’ll also place copies of them in the Library section of the website to allow ready access.
Let’s start out with a hit: Herzberger v. Standard Insurance Co., 205 F.3d 327 (7th Cir. 2000). Herzberger is noteworthy for its straightforward statement of the need for ERISA plan administrators and insurers to write their plan documents and insurance polices in clear, unambiguous language that gives notice to employees and their dependents of the benefits they are entitled to and the limitations on those benefits.
In Firestone Tire & Rubber v. Bruch, 489 U.S. 101 (1989), the Supreme Court held that federal courts will defer to an ERISA plan administrator’s or insurer’s determination of eligibility for benefits or interpretation of the language of an ERISA plan only if the plan grants discretion to the plan administrator or insurer. In the absence of such language, the court will review a plan administrator’s decision under a de novo standard, for whether it is right or wrong. But if discretionary language is in the plan documents, the court will be much more deferential to the plan administrator and will reverse that decision only if it is clearly unreasonable.
The question about the proper standard of review may make the difference between whether a claimant wins or loses in court. Consequently, what language is sufficient to grant discretion is a big deal. I discussed this somewhat in earlier postings here and here.
The specific issue in Herzberger was whether language requiring that a claimant present to a disability insurer “proof” or “satisfactory proof” of her disability was sufficient to trigger a deferential review by the trial court. Judge Richard Posner rejects the insurer’s argument in his typically accessible writing style. First he notes that health, disability and life insurance benefits are becoming increasingly important components of compensation for employees and their families. As a result, it is critical for them to know what it is that they are getting: “the broader the discretion [granted to the insurer], the less solid an entitlement the employee has and the more important it may be to him, therefore, to supplement his ERISA plan with other forms of insurance. In these circumstances, the employer should have to make clear whether a plan confers solid rights or merely the ‘right’ to appeal to the discretion of the plan’s administrator.”
The critical issue, according to Judge Posner, is whether the plan documents give fair notice to the employee of limitations on benefits: “an employer should not be allowed to get credit with its employees for having an ERISA plan that confers solid rights on them and later, when an employee seeks to enforce the right, pull a discretionary judicial review rabbit out of his hat. The employees are entitled to know what they are getting into, and so if the employer is going to reserve a broad unchanneled discretion to deny claims, the employees should be told about this, and told clearly.”
Since being issued Herzberger has generally been followed by other courts. The federal Circuits are still split on the issue–a couple still hold that the language at issue in Herzberger is sufficient to grant discretion to ERISA plan administrators–but generally the tide is with Judge Posner on this issue. And that is a very good thing for consumers in our country. Decisions emphasizing the need for insurers to fully disclose their coverage limits and exclusions in plain language are critical if employees and their family members are going to be able to get the benefit of their insurance premiums.