Employee Retirement Income Security Act (ERISA)
The most important determination with regard to a Disability Income policy is whether or not it is governed by a federal law called the Employee Retirement Income Security Act (ERISA). The transformation of a disability insurance policy into an ERISA plan occurs when the insurance is provided as an employee benefit with a variety of exceptions such as church plans and governmental entity plans or policies under ERISA’s safe harbor exceptions. Be advised that many times policies which were never meant to be part of an employee benefit plan are, in fact, interpreted as such, and ERISA is applied. ERISA is a strong shield for the insurer in employee benefits litigation. The acronym “ERISA” has been dubbed: “Everything Rotten Invented Since Adam” due to the statute’s unintended but devastating impact on plan participants.
ERISA’s Primary Purpose – Protection of Plan Participants
The primary purpose of ERISA was the protection of plan participants; however, the application of ERISA has not carried this purpose to fruition.
The ERISA statute provides in pertinent part:
[E]very employee benefit plan shall–
(1) provide adequate notice in writing to any participant or beneficiary whose claim for benefits under the plan has been denied, setting forth the specific reasons for such denial, written in a manner calculated to be understood by the participant, and
(2) afford a reasonable opportunity to any participant whose claim for benefits has been denied a full and fair hearing by the appropriate named fiduciary of the decision denying the claim.
29 U.S.C. § 1133 (1988). Accordingly, ERISA requires that “Every plan shall establish and maintain a procedure by which a claimant or his duly authorized representative has a reasonable opportunity to appeal a denied claim to an appropriate named fiduciary or to a person designated by such fiduciary, and under which a full and fair review of the claim and its denial may be obtained….” 29 C.F.R. § 2560.503-1(f)(g).
Courts have noted that “these procedural guidelines are at the foundation of ERISA” because Congress intended that ERISA provide plan administrators and participants the opportunity and freedom to resolve internal disputes without necessarily having to resort to the expense and delay of the courts.
ERISA Protects Plans Not Employee Plan Participants
Unfortunately, the ERISA statute has become an effective shield for the insurance companies to deny valid claims without fear of incurring bad faith and punitive damages for their actions. Generally, the outcome of litigation on an LTD claim governed by ERISA is that the insurance company is forced to pay the past due benefits, and at the court’s discretion interest on the past due benefits and the attorney fees and costs on a claim that was improperly denied. Therefore, it is extremely important that a claim be properly presented from the date of initial application with the strongest evidence possible.
Under policies governed by ERISA, the insurance company really has an incentive to deny the claim and take their chances in court. That is why insurance companies have gone so far as to even establish special tasks forces to promote the identification of policies which may be covered by ERISA and to initiate active measures to get new and existing policies covered by ERISA. A now well circulated “Privileged Provident Internal Memorandum” from the IDC (Individual Disability Group) stated:
The advantages of ERISA coverage in litigious situations are enormous: state law is preempted by federal law, there are no jury trials, there are no compensatory or punitive damages, relief is usually limited to the amount of the benefits in question, and claims administrators may receive a deferential standard of review. The economic impact on Provident from having policies covered by ERISA could be significant. As an example, Glenn Felton identified 12 claim situations where we settled for 7.8 million in the aggregate. If these 12 cases had been covered by ERISA, our liability would have been between zero and $0.5 million.
Because ERISA provides a shield to the insurance company, many companies take an aggressive approach to claims even in the face of strong medical evidence, particularly if their own medical reviewers in house or third party medical vendors have provide a medical opinion supporting a denial.