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Discretionary Clauses in Employee Retirement Income Security Act (ERISA) policies — In protecting deference in the face of substantial claims procedure violations, the United States 5th Circuit’s position not only conflict with other United States Circuits but with the Texas Department of Insurance and other state insurance commissioners regarding what is fair to an insured.  In the balance between an individual insured’s rights and the efficiency of the federal court system, the 5th Circuit has found the latter to be more important, perceiving de novo review to be a threat to the court’s efficiency.  The Texas Department of Insurance and Texas legislators perceive deference to be a greater threat.

In 2010, the Texas Commissioner of Insurance wrote as follows regarding discretionary clauses in policies that are meant to bind a court to deferential standard of review:

“Discretionary clauses are unjust, encourage misrepresentation, and are deceptive because they mislead the consumers regarding the terms of coverage.  For example, a consumer could reasonably believe that if they are disabled they will be entitled to benefits under the policy and will be able to receive a full hearing to enforce such rights in court.  Instead, a discretionary clause permits a carrier to deny disability income benefits even if the insured or enrollee is disabled, provided that the process heading to the denial was not arbitrary or capricious.”
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The United States 5th Circuit Court of Appeals has never found sufficient claims procedure abuse to warrant a change in the standard of review from abuse of discretion to a preponderance of the evidence in an Employee Retirement Income Security Act (ERISA) case.  In that regard, the court has noted that “this circuit has rejected arguments to alter the standard of review based upon procedural irregularities in ERISA benefit determinations, such as delays in making the determination ….  Absent potential wholesale or fragrant violations that evidence an utter disregard of the underlying purpose of the plan, this court does not heighten the standard of review from abuse of discretion to de novo.

Oddly, the 5th Circuit has protected deference to the factual determinations of the claims fiduciary even when the claims fiduciary did not make any factual determinations.  This resulted from the 5th Circuit’s overriding concern that allowing de novo review of ERISA benefit claims will clot the veins of the federal court system.  Regarding this, this court has held as follows:

The courts simply cannot supplant plan administrators, through de novo review, as resolvers of mundane and routine fact disputes.  Considerations of expediency therefore support reference to factual determinations made in the administration of the plan.  Otherwise, federal trials are encouraged in the vast number of claims that are filed in the thousands of ERISA plans throughout this county. . .  We therefore conclude that a deferential standard of review for factual determinations is buttressed, if not compelled, by practical considerations.
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Lawyers handling Employee Retirement Income Act (ERISA) cases will tell you that the answer to the above question is … nothing happens.

Generally, the United States Supreme Court has not allowed any remedy that is not clearly expressed within ERISA’s provision 29 U.S.C. Section 1132.  Section 1132 allows for injunctive relief and the monetary remedies limited to (1) up to $100 per day for a plan administrator’s failure to provide certain documents to a plan participant within 30 days of a proper written request, and (2) benefits that should have been paid under the plan pursuant to Section 1132(a)(1)(B).

A narrow opportunity for an additional monetary remedy is created by allowance of “other appropriate equitable relief” under Section 1132(a)(3).  The Supreme Court’s decision in CIGNA Corp. v. Amana opened the door to a potential monetary remedy under paragraph (a)(3), reviving the term “surcharge” relief from decisions by the equity courts during the days of the divided bench.  Surcharge relief is available for certain consequential damages that might result from violations of ERISA.  In SIGNA, the claimants alleged violations of ERISA due to improper notice of modifications to the Cigna pension plan that resulted in financial harm to some pensioners.  The court allowed that monetary relief might be available to some plan participants as a “surcharge” remedy.

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The Employee Retirement Income Security Act (ERISA) is governed by federal statutes.

The claims procedures originate from 29 U.S.C., Section 1133 and 1135.  Section 1133(1) requires that a carrier or claims administrator provide adequate notice of the reasons for denial that can be readily understood by the claimant.  Section  1133(2) requires ERISA plans to afford claimants a full and fair review, usually called an appeal, of a denied claim by a claim fiduciary.  The full and fair review is usually conducted by the same entity that issued the denial, typically an insurance carrier or third-party administrator, but must be conducted by someone other than the adjuster who denied the claim.

Section 1135 grants the power to the Secretary of the U.S. Department of Labor (DOL) to establish claims regulations that comply with ERISA.

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Employee Retirement Income Security Act (ERISA) issues can be more onerous than most people can imagine.

Most people who get their insurance from work do not think about it except the the extent of how much it costs, the extent of coverage, and which providers are in the network.  Rarely will anybody consider the differences in litigating a denied claim between one type of coverage and another type of coverage.  When a plan is not an ERISA plan, the insured stills retains their rights under the Texas Insurance Code.  And the insurer suffers penalties if a trier of fact determines the insurer took advantage of the insured or was slow about paying the insured’s claims.

The Texas Insurance Code levels the playing field between the insurer and the insured.  As the Texas Supreme Court has stated:

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The Employee Retirement Income Security Act, otherwise known as ERISA provides for insurance benefits that are vital to claimants and their families.  An ERISA claim denial means that the claimant did not receive the medical treatment, disability income, life insurance or retirement benefits that the claimant expected under the plan.  A medical benefit denial can mean the difference between life and death as was seen in the case styled, Conway v. Louisiana Health Service & Indemnity Co. d/b/a Blue Cross Blue Shield.

The Federal Courts give deference to the decisions of the plan administrators in insurance plans governed by ERISA.  The Fifth Circuit Court of Appeals recently described the power of ERISA judicial deference this way:

As any sports fan dismayed that instant replay did not overturn a blown call learns, it is difficult to overcome a deferential standard of review.  The deferential standard
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Who is entitled to life insurance benefits is not always an easy answer.

The designated beneficiary of a life insurance policy generally is entitled to the proceeds upon the death of the insured.  Absent an adverse claim, the insurer may pay the benefits to the designated beneficiary.   This is not a difficult concept but is affirmed in the 1967, Texas Supreme Court opinion, McFarland v. Franklin Life Insurance Co. and in the Texas Insurance Code, Section 1103.102.

As is pointed out in the 1968, Texas Supreme Court opinion, McAllen State Bank v. Texas Bank & Trust Co., the insured’s pledge of the policy proceeds may give a creditor rights superior to the named beneficiary.

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Pinning down the exact date coverage begins can sometimes be a tricky proposition.  If an insured dies before a policy becomes effective, there is no coverage.  This was discussed in the 1950, Texas Supreme Court opinion, Republic National Life Insurance Company v. Hall. and the 1980, Eastland Court of Appeals opinion, Durham Life Insurance Company v. Cole, and both are worth reading to understand the issues the courts look to, for their decisions.

A policy may also contain a “good health” clause that requires that the insured be in good health at the time the policy is issued or the coverage will not take effect.  This is discussed in the 1979, Texas Supreme Court opinion styled, Washington v. Reliable Life Insurance Co. and the 1977, Amarillo Court of Appeals opinion styled, United Savings Life Insurance Company v. Coulson.  A good health clause renders the policy void if the insured was  not in good health.  In contrast, a false representation of good health provides a defense only if other elements, such as intent to deceive, are proved.

Keep in mind that just as there are disputes whether coverage took effect before the insured died, there may also be disagreements over whether coverage terminated before the insured’s death.  This is discussed in a 1985, San Antonio Court of Appeals opinion styled, Eagle Life Insurance Company v. G.I.C. Insurance Company and in the 1979, Fort Worth Court of Appeals opinion styled, Leach v. Eureka Life Insurance Co. of America.

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Life insurance lawyers will see many reasons for denial of life insurance benefits.  Occasionally, one of the reasons is that the policy had not become effective at the time of death.

Most policies state the “effective date” of coverage.  This date may be earlier than, or later than, the date the first premium is paid or the dates the policy is issued or delivered.  Often, a policy may have an effective date, an issue date, and a policy date, and may all be different, causing confusion or misunderstanding.  If the dates differ, disputes may arise over when the policy actually took effect or terminated.  The effective date can be important in setting the due date for subsequent premiums and thus the date of any lapse or failure to pay a premium.

The 1980, Texas Supreme Court opinion styled, Life Insurance Company of the Southwest v. Overstreet illustrates how confusion can sometimes create problems for the beneficiary.  In Overstreet, a policy provided that its effective date was March 15th and each annual premium was due on the anniversary of that date.  The insured did not pay his first premium until April 18th.  Two years later, the insured died while his premium was due.  If the effective date was measured from March 15th, he dies outside the grace period and had no coverage.  If measured from April 18th, he died within the grace period, and within coverage.  The Texas Supreme Court held there was no coverage, following the majority rule that “a definite statement in the policy of the date on which annual premiums will be due is the due date.  Such a statement of the due date controls even over a provision stating that a policy will not be in force until it is initially delivered and the first premium is paid during the good health of the insured.

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Almost all auto policies will have a form to fill out called a 515A.  This form when filled out and signed excludes named drivers from any coverage while they are operating the otherwise insured vehicle.

This topic was discussed in a declaratory judgement opinion from the Dallas Court of Appeals styled, John Dempsey v. ACCC Insurance Company.

ACCC sought to have the Court declare that ACCC had no liability under a policy of insurance issued to Sherman Clifton.  Shashana Clifton was an excluded driver under the policy.  All the paperwork making the exclusion binding was properly completed.

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