In Gagliano v. Reliance Standard Life Ins. Co., 2008 WL 4916330 (4th Cir. 2008), an employee’s claim for long-term disability benefits was denied on the ground that she was not disabled under the terms of the plan.  The court ordered an independent medical examination that stated the employee was disabled but the plan administrator (who was also the insurer) denied the claim on appeal based on the plan’s preexisting condition exclusion.

The plan administrator stated that its second decision was final and that the employee had no ability to appeal the denial. The court ruled that the insurer could not state new grounds for termination at the appeal stage since there was no “full and fair review” as required by ERISA.

The trial court decided that the proper remedy for the insurer’s procedural violation was to reinstate the employee’s disability benefits and the insurer appealed.

The Fourth Circuit agreed that the plan administrator had violated ERISA but ruled that the trial court’s remedy was improper. The proper remedy for the plan administrator’s violation of the claim procedure rules was to remand the case to the administrator for completion of the full and fair review.  Reinstatement without that review might result in the payment of benefits contrary to the terms of the plan, which would violate ERISA’s requirement that plans be administered in accordance with their terms. The only exception to remand would be where the benefit denial was an abuse of discretion as a matter of law.

ERISA does not specify what happens when the claims procedure rules are violated. The Sixth Circuit has concluded that denying a claim on appeal based on a previously unmentioned reason justifies reinstatement of the participant’s disability benefits. But the Fourth Circuit has now rejected that conclusion, agreeing with the dissent in the Sixth Circuit case that there is no statutory basis in ERISA for ordering benefits as a penalty for violating procedural requirements.   Expect more litigation to follow.

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This entry was posted by Adam V. Russo on Wednesday, December 3rd, 2008 at 4:21 pm and is filed under 4th, 6th, Claims Review, ERISA. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.