Our firm's attorney David Martin has an article published in the Alabama Association for Justice titled Stand up for Justice, which explores the gross unfairness in ERISA, which deprives thousands of people of lawfully receiving their long-term disability benefits. There is a bill seeking to change that. Read more on what you can do to urge support of that bill and a change in the law.

Stand Up for Justice

1. Intro

We are the Alabama Association for Justice, dedicated to stand for justice. There is an injustice  that has persisted far too long. It is an issue affecting millions of people in our country, who, in ordinary vernacular, are being ripped off. These are the people who have benefits such as long-term disability, life insurance, retirement or pensions, and health insurance through the workplace. These people just want to receive what they worked and paid for.

The law that governs the rights of most of these people is called the Employee Retirement Income Security Act of 1974 (ERISA). They are ripped off because benefit plans reserve discretion for the decisions of claims administrators. This means that a wrong but reasonably based decision can be used to deny every claim. This article focuses on disability claims. The unfairness of ERISA disability claims is overwhelming, when compared to disability claims under state law. Discretionary clauses permit actions that regularly fall far below market standards, but insurers are able to avoid liability despite their fiduciary duties. Such actions would be bad faith if state law applied.

There has been a move to change the law, but it has gathered very little support and is largely unnoticed. Part of the problem is that people do not have a unified voice and typically they consider this to be someone else's problem. Add to that the fact that very few attorneys represent individuals with ERISA claims. The law is very complex, much different than ordinary civil litigation, and there is no recovery for punitive damages and mental anguish damages. The result is that too few speak out at once.

The discretionary clause problem affects millions of people. Here are a few statistics to consider. Short-term disability insurance was available to 40 percent of civilian workers in March 2020, and long-term disability insurance was available to 35 percent.[1] The number of people in the workforce in 2020 was 190,776,800.[2] That means as of two years ago over 76 million people had short-term disability insurance, and over 66 million had long-term disability insurance. In 2020 and using a very modest level of premium of $20 per month, $1,520,000,000 are paid out every month as to short-term disability alone. As to long-term disability and given a very modest premium of $60 per month the amounts paid rise to at least $3,960,000,000 every month. As our labor force expands, and as employers expand benefit packages, the amount at stake grows. Those premiums are intended to provide for people in their time of need.

There are a surprising number of people experiencing a disability. According to the Social Security Administration, every year 12% of the adult U.S. population suffers a long-term disability. One out of every seven workers will suffer a five-year or longer period of disability before age 65. With the US working population at nearly 191 million in 2020, that is 27 million people in 2020 suffering a long-term disability! Applying that 12% statistic to the number of people with long-term disability insurance noted above, that means there are 9 1/2 million people with long-term disability claims in 2020. That number is increasing no doubt as the job market is more competitive driving employers to provide better benefit packages.

Discretionary clauses allow insurers to deny most claims, enhancing profits yet many people are unable to locate counsel who will take their case and so many of these claims simply fall by the wayside. Many cases are simply not cost-effective to file individually and they do not meet the requirements of a class action. While a small number of claims do get filed in both federal court and state court, they are only the tip of the iceberg. Insurance companies can treat those few cases as a small cost to do business.

Litigation does nothing to turn the tide, as my own observation over the last 25 years documents that in ERISA cases involving a discretionary clause, the plaintiff prevails only 20% to 30% of the time. Settlements are typically for more less than the full value of the claim as a result.[3] On the other hand, when there is no discretionary clause, the plaintiff prevails more in the 60% to 70% range.

Ost workers are then paying premiums for insurance that is not likely to pay their claim forcing them to rely more heavily on public assistance. While I am certainly glad for the safety net of public assistance, when people do purchase insurance to provide for their time of need, it is grossly unfair to force the entire working population to bear an increased burden instead of the insurers.

Are the costs of public assistance really shifted? When people do not receive their disability benefit, many are forced to survive on social security disability alone. The Social Security Administration informs that social security was only designed to supplement disability or retirement. It is intended to be only a part of the plan for ceasing work. Yet back in 2016, AARP[4] says 20% of married couples and 40% of singles receive 90% of income from social security alone.[5] That shift in costs occurs when people do not receive enough social security monies to pay for medicine, medical care co-pays, food, utilities, shelter, and clothing. Perhaps society should cover the short fall, but should that be increased when claims are not adjudicated fairly?

There have been efforts to challenge the status quo, but more support is needed. Otherwise, the voices heard are only the few attorneys who regularly practice in this area of law, and scattered exasperated claimants.[6] Several approaches to push toward justice will be explored as well as efforts to deal with the existing problem.

1. Federal Legislation – Dead on Arrival?

Ever since the case Firestone v. Bruch, 489 U.S. 101 (1989), the significant unfairness with ERISA claims has increased. That case served as a blueprint for disability plans to reserve discretion to determine all facts and interpret all policy provisions. Ever since that decision nearly all plans reserve discretion and so courts must give deference to the decisions of claims administrators or plan administrators. Thus, wrong decisions but with a reasonable basis, require the court to enforce the decision.

A key question is what is reasonable? Some courts have interpreted what is reasonable to mean something more than a scintilla[7] of evidence. To put this into mathematical percentages, that is far less than a 50% chance of being the right result and for some even less than 25%. It is difficult to understand that if 75% of the evidence militates in one direction, that might not be enough to prevail if the policy or plan document reserves discretion.

This has been frustrating for millions of deserving people who thought they were insured or covered by a plan benefit, only to find out in their time of need that their claim was not approved, despite the majority of the evidence being in their favor. One misunderstood comment by one physician or nurse might be enough to cause a claim to be lost. Insurance companies have taken to hiring nurses to comb medical records to cobble together some reason to deny the claim. There is also no dearth of physicians who are tired of treating patients, and instead are perfectly willing to review files and provide opinions in favor of insurance companies and plan administrators. Any insurance company or plan administrator intent on denying a claim can legally do so under ERISA, as long as a court thinks the decision has a reasonable basis, even if wrong.[8] Discretionary clauses leave little room for accountability.

This problem has been so severe that many savvy employees do not see the point of having disability insurance through the workplace. While the motivation of Congress in setting up ERISA was to encourage employers to offer benefits through the workplace, the Supreme Court's grafting of deference from the discretionary clause onto ERISA has swung the pendulum too far. Most employees, who are unaware of these issues and assert claims, are frustrated and angry over working for or paying for benefits that do not actually provide a benefit.

Recognizing the problem, on May 12, 2022, Representatives, by Mark DeSaulnier (D-CA) introduced H.R. 7740 the “Employee and Retiree Access to Justice Act” in the House of Representatives, and Senator Tina Smith (D-MN) introduced a companion bill, S. 4219 in the Senate. The bill, if made law, would ban arbitration and discretionary clauses in employer-sponsored benefit plans governed by the Employee Retirement Income Security Act (ERISA).

Arbitration has finally been getting legislative traction. Far more lawyers are involved with jury trials than are involved with ERISA cases, and despite that, it has still taken years of effort. However, discretionary clauses in ERISA are also unfair but they also impact millions of people and involve billions of dollars each month! This issue is very deserving of attention! It is time to stand for justice on this.

This bill has been ardently opposed by insurance companies and their counsel. They warn that premiums will go sky high, there will be a flood of litigation, and employers will stop providing benefits. In every other area of the law, we let the marketplace and fairness rule the day, and so with ERISA, should we countenance the unfairness in favor of allowing this travesty to continue?

The assertions also are not likely to be true. Public institutions such as state universities, offer disability, life and health insurance to their employees. These claims generally are not governed by ERISA and thus, do not involve the discretionary clause issue. Yet the premiums are comparable with private employers. There is also no flood of litigation arising out of these claims. State employees continue to see disability benefit offerings. Significant bad faith verdicts arising out of benefits in the workplace remain rare.[9]

There is also the issue of whether a ban would apply to self-funded plans. If an employer is going to go to the trouble of self-funding a long-term disability plan it certainly should be willing to see the plan administered fairly. Otherwise, is it really providing a benefit to its employees? A revision to the ERISA statute itself to ban discretionary clauses is needed and it must be applicable across-the-board to insurance company funded plans as well as employer self-funded plans.

Presently this bill has been considered dead on arrival, but efforts need to be attempted again. More support is needed by all attorneys interested in justice and especially those who offer excellent employee benefit packages to their employees. The money spent should matter.

III.       State Discretionary Clause Bans

Many states have banned discretionary clauses if insurance is involved.[10] The first question of course is whether ERISA preemption would preclude any effort to ban discretionary clauses in disability policies. The Supreme Court however has made clear in Rush Prudential HMO Inc. v. Moran, 536 U.S. 355, 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002), that the ERISA statute, 29 U.S.C. § 1144(b)(2)(A) expressly saved from preemption laws regulating insurance.[11] In that case, an Illinois law mandating independent review of claims denied by health maintenance organizations was not preempted. Not long after that, efforts were undertaken to ban discretionary clauses.

In 2004, the National Association of Insurance Commissioners began working on an act to be used by states to ban discretionary clauses. A model act was published that year.[12] Here is the key provision pertaining to long-term disability policies:

1. No policy, contract, certificate or agreement offered or issued in this state providing for disability income protection coverage may contain a provision purporting to reserve discretion to the insurer to interpret the terms of the contract, or to provide standards of interpretation or review that are inconsistent with the laws of this state.

So far by my count, 24 states have taken action to ban discretionary clauses either with a statute, regulation, advisory opinion, or bulletin through the insurance commissioner. No states in the 11th Circuit have current activity to ban discretionary clauses. The nearby states of Texas, Arkansas, and Kentucky do have some form of a ban. Alabama should pass such a statute to help until a federal law is passed.

Before 2010, a model act for Alabama was proposed utilizing the following provision:

Section 1. Notwithstanding any provisions of law, a clause in a policy or certificate of insurance offered or issued in this state which reserves discretion to the insurer to interpret the terms and/or to provide standards of interpretation of the policy or certificate shall be void and unenforceable.

This model act did not attract enough attention to become law.

It is commendable that the governor has established the Governor's Office on Disability. (GOOD). Its “mission is to facilitate the inclusion of Alabamians with disabilities in education, employment, housing, transportation, health care, and leisure.”[13] The office was needed, as the Centers for Disease Control and Prevention (CDC) found that, in our state, one out of every three adults has a disability which pertains to issues of mobility, cognition, independent living, hearing, vision, and self-care.[14] Our state needs to act further on this issue of disability, and recognize the costs being imposed on our state because of the easy ability of insurance companies to use discretionary clauses to shift its costs to the public. Those whose claims are denied more frequently fall into the safety net of social services, and do not have monies available for medical care, medications, food, shelter and clothing.

1. The Department of Labor Effort

The ERISA statute at 29 U.S.C. § 1133 authorizes the Secretary of the Department of Labor, to mandate minimum requirements for a “full and fair review” of denied claims. The statute does not define what is a full and fair review. The Secretary is left to determine that and has issued a regulation defining the “fairness” required of the claim process. The regulation for the claim procedure is 29 C.F.R. §2560.503-1. Courts must defer to the Department of Labor regulation for guidance as to the minimum standards for a full and fair review.[15]

The Department of Labor made an effort to address the growing unfairness of discretionary clauses, which were often coupled with unfair claim reviews. In 2018 the claim procedure regulation was amended. The work on the regulation obviously was performed the prior year under the Obama administration, and upon the Trump administration taking office, new DOL personnel carefully reviewed the regulation to make certain that it should proceed under the new president. It was determined that it should, and the regulation was published. Subsection (l)(2)[16] limited its applicability to new claims and ongoing claims since disability claims are determined a month at a time typically.

1. Blown Deadlines – No Deference

The regulation was particularly aimed at stripping away the deference due a decision made utilizing the discretionary clause when the requirements of a full and fair review were not met. One unfairness was the fact that decisions were not being timely made despite rules requiring as much. Accordingly, subsection (l)(2)(i) confirms that once the claim administrator's applicable deadline to issue a written claim decision has expired, that claim is “deemed denied on review without the exercise of discretion by an appropriate fiduciary.” The Department of Labor was rather astute and careful to note that it was not intending to dictate to the courts the level of deference due, but rather relying on its regulatory authority as to when the claim was finally denied.[17] Courts have recognized the failure to follow a deadline as grounds to apply this regulation, and to grant a de novo review.[18]

1. Other Violations without Good Cause or Circumstances beyond the Control

Of course, the regulation speaks to more than just deadlines. It has many requirements as to what, at a bare minimum, constitutes a full and fair review. There is a “strict adherence” rule in Subsection (l)(2)(i), but then in this same section of the regulation subsection (l)(2)(ii) creates a limited exception to the “strict adherence” rule. That subsection provides that claims for disability benefits “will not be deemed exhausted based on de minimis violations that do not cause, and are not likely to cause, prejudice or harm to the claimant so long as the plan demonstrates that the violation was for good cause or due to matters beyond the control of the plan….”

Some of the more notable requirements “boiled down” are as follows:

1. Claim procedures must have administrative processes and safeguards to make consistent decisions with respect to similarly situated claimants. 29 CFR §2560.503-1 (b)(5)
2. There must be independent and impartial decision making. Cannot base hiring, compensation, termination, promotion etc. on likelihood that an individual will support the denial of benefits. 29 CFR §2560.503-1 (b)(7)
3. Must decide the claim within 45 days and only take two 30 day extensions maximum. 29 CFR §2560.503-1 (f)(3)

1. Extensions are only for matters beyond the control of plan. Plan administrator must decide than an extension is necessary for matters beyond control and must notify claimant within the time frame applicable either 45 days or 30 days. 29 CFR §2560.503-1 (f)(3)
2. Tolling of time frames is only allowed to receive information from claimant. Tolling is only permitted when there is a failure of claimant to submit required information necessary to decide a claim. Tolling continues until the claimant responds. 29 CFR §2560.503-1 (f)(4),(i)(4)
3. Adverse determinations must be provided in writing or electronically and calculated to be understood by the claimant. 29 CFR §2560.503-1 (g)(1)
4. The specific reason or reasons are noted in the adverse determination. Again, that must be calculated to be understandable by the claimant. 29 CFR §2560.503-1 (g)(1)
5. Every plan provision relied upon must be noted in the letter. 29 CFR §2560.503-1 (g)(1)
6. Must describe material or information needed and why it is needed. Must provide a description of additional material or information to perfect the claim and why it is necessary. 29 CFR §2560.503-1 (g)(1)
7. Must explain the basis to disagree with healthcare and vocational professionals. Must provide an explanation for disagreeing with or not following healthcare and vocational professionals. 29 CFR §2560.503-1 (g)(1)
8. Explain the reason to disagree with the plan's medical and vocational opinions. Must note the advice obtained and basis to disagree with or not follow those views regardless of whether relied on or not. 29 CFR §2560.503-1 (g)(1)
9. Provide or explain scientific or clinical judgment. Medical necessity or experimental treatment or similar exclusion or limit must be based on scientific or clinical judgment and either explain that judgment or provided upon request free of charge. 29 CFR §2560.503-1 (g)(1)
10. The claimant must be given the opportunity to submit information relating to the claim. 29 CFR §2560.503-1 (h)(2)
11. The claim record is provided upon request for free and it must include documents that are relevant to the claim whether relied on or not. 29 CFR §2560.503-1 (h)(2), (m)(8)
12. Must take into account comments, documents, records, and information shared by claimant. 29 CFR §2560.503-1 (h)(2)
13. Must give 180 days to appeal. This deadline runs from the receipt of a notification of an adverse benefit determination, must be written or electronic, and the claimant must receive at least 180 days to appeal that determination. 29 CFR §2560.503-1 (h)(3)
14. No deference to the initial adverse determination. The review cannot give any deference to the initial adverse benefit decision. 29 CFR §2560.503-1 (h)(3)
15. A different fiduciary must decide the appeal. It cannot be the same person making the initial decision and the decision on appeal, nor a subordinate to such individual. 29 CFR §2560.503-1 (h)(3)
16. A proper medical professional makes medical decisions. If medical judgment is involved, consult with a professional who has training and experience in the field of medicine involved. 29 CFR §2560.503-1 (h)(3)
17. Identify all medical and vocational experts consulted. The advice of medical and vocational experts given during the appeal must be disclosed and those persons must be identified regardless of whether relied on or not. 29 CFR §2560.503-1 1 (h)(3)
18. The medical professional used on appeal must be different than on the first decision. The medical professional cannot be involved with the initial claim decision nor a subordinate to anyone involved with the initial decision. 29 CFR §2560.503-1 (h)(3)
19. Before any final decision is made new evidence or rationale relied on or generated must be provided to claimant. 29 CFR §2560.503-1 (h)(4)
20. The new evidence and rationale or added rationale must be provided sufficiently in advance of the date when a decision is due with adequate time for claimant to respond with evidence or comment prior to that date. 29 CFR §2560.503-1 (h)(4)
21. Must make a decision on appeal in 45 days. 29 CFR §2560.503-1 (i)(1),(i)(3)
22. Special circumstances are necessary for an extension. Must give notice within the first 45 days of those special circumstances. 29 CFR §2560.503-1 (i)(1),(i)(3)
23. If a pattern and practice of violations exists the good cause exceptions shall not apply. 29 CFR §2560.503-1 (l)(2)

Even with the exception to avoid strict adherence, if the claimant provides notice of the violations and demands that good cause be furnished to excuse the violation, that must be provided within 10 days of the request. If that is not furnished that may well eviscerate any argument raised that the violation is de minimis and that there is good cause or circumstances beyond control to excuse the violation.[19] De novo review may be available.

Clearly the regulation helps but does not resolve the unfairness. The regulation is there to assist with the problems of deference being afforded, but counsel must be familiar with the regulation and then utilize it in connection with the client's claim. Few clients will be familiar with the regulation and know its application well enough to apply it. This is a helpful move, but a better change is with the statute.

1. Conclusion

The law regarding discretionary clauses needs to be altered. It will take a groundswell of support just as it did with advances made regarding arbitration clauses. This is a matter that will at some point affect you, your staff, your friends, or your loved ones. It already impacts millions of people across our nation. It is a matter that involves a significant economic shifting of millions of dollars onto the backs of tax payers. That burden is more fairly on the insurance companies receiving premiums. We need to see fairness here. We need to take a stand for justice, and ban discretionary clauses in disability policies and plans.

[1] Bureau of Labor Statistics, U.S. Department of Labor, The Economics Daily, Short-term and long-term disability insurance for civilian workers in 2020 at https://www.bls.gov/opub/ted/2020/short-term-and-long-term-disability-insurance-for-civilian-workers-in-2020.htm (visited August 23, 2022).

[2] See, https://united-states.reaproject.org/analysis/comparative-trends-analysis/total_employment/tools/0/0/#page_2  Pacific Northwest Regional Economic Analysis Project (PNREAP).

[3] Given there are no mental anguish or punitive damages recoverable and given that courts do not regularly award attorneys' fees, settlements are typically for a percentage of the reduced present value of the actual benefits at stake.

[4] AARP is an interest group in the United States focusing on issues affecting those over the age of fifty.

[5] www.aarp.org/socialsecurity

[6] Which is further reduced to a small number as ERISA long-term disability settlements typically involve a confidentiality clause muting the voices of those who settle their cases.

[7] A scintilla is some evidence, but not enough to be substantial or adequate for a reasonable mind to support a conclusion. Edison Co. v. Labor Board, 305 U.S. 197, p. 228 (1938).

[8] One Court recently thought an insurance company's interpretation of “plan” and “policy” to mean the same thing was wrong. Nonetheless it was reasonable despite the fact that this was inconsistent with ERISA and the policy itself.  Stewart v. Hartford Life & Accident Ins. Co., No. 21-11919 (11th Cir. Aug. 10, 2022).

[9] “The lady doth protest too much, methinks” … a line from the play Hamlet by William Shakespeare. For example the University of Alabama offers a disability policy benefit to its employees and it is governed by state law. Yet there is no “flood” of litigation in state or federal courts.

[10] There is no “spike” in premiums in these states, and insurance companies continue to competitively offer policies in these states.

[11] “Except as provided in subparagraph (B), nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A).

[12] https://content.naic.org/sites/default/files/MO042.pdf

[13] https://www.good.alabama.gov/

[14] https://www.cdc.gov/ncbddd/disabilityandhealth/impacts/alabama.html

[15] Lyons v. Georgia-Pacific Corp. Salaried Employees Retirement Plan, 221 F.3d 1235, 1244-45 (11th Cir. 2000).

[16] The new changes from the regulation “shall apply to claims for disability benefits under a plan on or after January 1, 2018.”

[17] The comments to the regulation make clear that it was not intending “to establish a general rule regarding the level of deference a court may choose to give a fiduciary's decision,” noting that this amendment “relies on the regulatory authority granted the Department in ERISA sections 503 and 505 and is intended to define what constitutes the final denial of a claim.”  See 81 Fed. Reg. 92316, 92327-92328.

[18] McQuillan v. Hartford Life and Accident Ins. Co., __ F.4th __ (2d Cir., June 7, 2022); Brewer v. Unum, case 1:21 – CV – 00694– CLM (N.D.AL August 22, 2022); Hasten v. Prudential Ins. Co. of Am., 470 F. Supp. 3d 1076 (N.D. Cal. 2020),  Fredrich v. Lincoln Life & Annuity Co. of N.Y., __ F. Supp. 3d __, 2022 WL 1537162 (E.D.N.Y., May 13, 2022).  See also, the pre -2018 regulation amendment case.  Fessenden v. Reliance Standard Life Ins. Co., 927 F.3d 998 (7th Cir. 2019), then-Judge Barrett's opinion ruling that “[t]he very point of a deadline is to impose a hard stop.” Id. at 1004. Judge Barrett further explained that “an untimely decision” necessarily leaves a court with “nothing to review at the time that administrative remedies are deemed exhausted. There is no explanation for a claimant to read and understand. And if the claimant files suit before the decision arrives, there is neither an exercise of discretion to which a court could defer nor anything for the court to use to measure the degree of the administrator's compliance.” Id. at 1005.

[19] 29 CFR §2560.503-1 (l)(2).