The Importance of Giving Clear Notice of Discretionary Language

Recently the U.S. Court of Appeals for the Fourth Circuit issued an opinion that discusses what language in an ERISA plan document is sufficient to confer discretionary authority on a plan fiduciary and trigger an abuse of discretion standard of review.

Woods v. Prudential Ins. Co. of America, 528 F.3d 320 (4^th Cir. 2008), is a typical disability insurance case. Patricia Woods was involved in an auto accident and thereafter filed a claim for benefits under her policy. The insurer denied the claim and Woods filed suit. The trial court ruled that the language in the plan document was sufficient to trigger an abuse of discretion, a highly deferential, standard of review. After the trial court ruled in Prudential’s favor, Woods appealed.

The Fourth Circuit decision spends most of its energy evaluating whether the language Prudential relies on is sufficient to trigger an abuse of discretion standard of review. The language Prudential argued conferred that authority simply said that "when Prudential determines" that Woods was eligible for benefits she would receive them and that Woods’ disability would be "determined by Prudential." The court ruled this language was not sufficient to trigger an abuse of discretion standard of review.

One of the primary reasons for its ruling is that the court felt that the language Prudential relied on is insufficient to give any reasonable person the heads up that if the dispute went to court, a judge would be deferring to Prudential rather than determining, using a blank slate, whether the insurer’s denial of benefits was correct. The ruling relies on one of the best cases discussing the importance of insurers placing language in their insurance policies that clearly tells people about the abuse of discretion standard of review: Herzberger v. Standard Ins. Co., 205 F.3d 327 (7^th Cir. 2000). In Herzberger, Judge Posner states that if an insurer wants a deferential standard of review in court, it must include language in its plan document that unambiguously tells the insured about the authority the insurer retains and the effect of that authority if the matter goes to court. Doing so will then help the person shopping for insurance to realize that they don’t have the financial protection they might otherwise think they have.  Without such clear notice, Judge Posner ruled that insurers are not entitled to a deferential standard of review in court.  In Woods, the Fourth Circuit agreed.