Arbitrary and Capricious Standard of Review under ERISA - The Factors That Must be Met to Overturn ERISA Claim Denial

The Employee Retirement Income Security Act of 1974 (ERISA) provides a cause of action for employees to challenge a wrongful denial of benefits under an employee benefits plan in a federal district court.  The standard of review applied by the district court will have a profound impact on the possibility of winning the lawsuit for the employee/claimant.

A standard of review is the measure of deference the court gives to the ruling of the lower court.  In the ERISA litigation context, the standard of review determines how much credit the court has to give to the decision of the insurance plan administrator in admitting or denying a claim for benefits.

There are two different standards of review that can be applied in an ERISA case: de novo review and deferential review.  De novo review basically means that the district court judge gives no credence whatsoever to the plan administrator's decision to deny benefits.  Under de novo review, the judge looks at the administrative record and makes their own decision.  De novo review is very much preferred by employees/claimants who have been denied their insurance benefits.  However, most of the time the standard of review is deferential, and the decision of the plan administrator will only be overturned by a judge if the plan administrator's decision was arbitrary and capricious.

Firestone v. Brusch

ERISA was enacted by Congress to promote the interest of employees and their beneficiaries.  in 1989, the United States Supreme Court decided the case of Firestone v. Brusch, and this decision would end up devastating the original intended purposes of ERISA.  

The Court rules in Firestone v. Brusch that a denial of disability benefits challenged in federal court will be reviewed by the federal court under a de novo standard ... unless the insurance plan gives the insurance plan administrator discretionary authority to determine eligibility for benefits or to construct the terms of the plan.  Firestone v. Brusch, 489 U.S. 101, 115 (1989).  

Ever since the United States Supreme Court decided the case of Firestone v. Brusch in 1989, if an insurance company inserts language in their insurance policy stating that the plan administrator has absolute discretion to admit or deny a claim for benefits, then a deferential arbitrary and capricious standard of review will apply.  Ever since this decision, nearly all insurance companies insert this special language into their insurance policies in order to get the arbitrary and capricious standard of review.  However, not all insurance companies have this language and some insurance companies do not do a good enough job of putting the language in the policy to actually get the deferential arbitrary and capricious standard of review.  Some insurance companies have a short little blurb about giving plan administrators some sort of discretion in admitting or denying claims for benefits.  Insurance companies sometimes make the language ambiguous because they want employers to sign up for their insurance plans.  However, most courts will find that the language in an insurance policy has to be crystal clear and unambiguous in granting a plan administrator discretion in granting or denying insurance benefits.

6th Circuit's Modified Arbitrary and Capricious Standard

The United States Court of Appeals for the 6th Circuit (the highest level of federal court (under the U.S. Supreme Court) in Kentucky, Michigan, Ohio, and Tennessee) has somewhat of a more favorable to employee standard of deference.  In McClain v. Eaton Corp. Disability Plan (6th Cir. 2014), the court held that the decision of an insurance plan administrator is accorded extreme deference, but it will only be upheld if the decision resulted from a principled reasoning process.  

The arbitrary and capricious standard of deference is overall very bad for workers trying to get their ERISA benefits because it makes it very hard for the benefit claimants to win cases.  However, it is a step in the right direction for workers that the 6th Circuit at least requires a "deliberate sensible reasoning process ... supported by substantial evidence."  McClain v. Eaton Corp. Disability Plan (6th Cir. 2014).  

Conflict of Interest

Some courts across the country apply a modified arbitrary and capricious standard of review when there is a conflict of interest with the plan administrator.  There is usually an inherent conflict of interest with plan administrators.  The plan administrator is usually the insurance company.  Most typically, if the insurance company pays out benefits, they lose money.  If the insurance company denies claims, they save money.  When a plan administrator is saving their employer money by denying valid benefit claims, it presents a pretty serious conflict of interest.  Courts will weigh in that conflict of interest as a factor in whether and how much deference they will afford the plan administrators.

Ohio ERISA Lawsuit Attorney

If you've been denied benefits that were part of an employee benefit plan, then you should consult with an ERISA lawsuit attorney.  You can speak with an ERISA lawsuit attorney today by calling (614) 610-9988.  The law firm of Harris & Engler helps people across Ohio with ERISA related issues.   

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