ERISA And Abuse Of Discretion

ERISA stands for Employee Retirement Income Security Act of 1974.  The way ERISA cases are handled is unique from a legal perspective.  This is illustrated in a 2021, opinion from the Eastern District of Texas, Sherman Division.  The opinion is styled, Carol Sue Allen, Et Al. v. Sherman Operating Company, LLC.

This is an appeal from a Magistrate’s summary judgment ruling in favor of Sherman.

Allen was injured at work.  She made a claim for disability benefits under a plan provided by her employer, which is an ERISA plan.  Her claim for benefits was denied by the plan administrator.  She filed suit alleging various causes of action.  The cause of action discussed here has to do with her assertion there were violations of the ERISA plan.  She claims the plan administrator abused its discretion when her clam for benefits.

As the Magistrate Judge correctly stated: “When a district court reviews an ERISA plan administrator’s benefits determination, the court applies a de novo standard of review unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan.”  Where an ERISA plan contains a valid delegation clause, a district court affords the plan administrator deference and reviews the plan administrator’s decision for abuse of discretion.

The United States Fifth Circuit, in an earlier opinion, overruled prior precedent and held where an ERISA plan does not contain a discretionary clause giving the plan administrator discretionary authority, the administrator’s denial of benefits is subject to de novo review rather than review for abuse of discretion, regardless of whether the denial is based on a legal or factual determination.  The Fifth Circuit acknowledged that the Texas Legislature amended the Texas Insurance Code to prohibit discretionary clauses in insurance policies, which rendered discretionary clauses in insurance policies unenforceable.  However, the Fifth Circuit did not hold that discretionary clauses in ERISA plans not governed by the Texas Insurance Code are unenforceable.  In cases post-dating the decision, the Fifth Circuit has reviewed a plan administrator’s decision for abuse of discretion where the ERISA plan contains a clause delegating discretionary authority to the plan administrator. The Magistrate Judge acknowledged such in her Report.

Moreover, the provision of the Texas Insurance Code, Section 1701.062(a), banning discretionary clauses applies only to certain insurance policies.  Sherman contends that the Plan is not an insurance policy within the meaning of the statute.  Having reviewed the Plan, the Court agrees.  Section 1701.062(a) states that “[a]n insurer may not use a document described by Section 1701.002 in the state if the document contains a discretionary clause.”  The documents referenced in Section 1701.062(a) and “described by Section 1701.002” are “form [insurance policy documents] that [insurance companies] may use in transacting their business,” and such form policies must be filed with the Texas Department of Insurance.  Thus, Section 1701.062(a) concerns form insurance policy contracts developed by insurance companies, approved by TDI, and issued by insurers.  On its face, the Plan, which establishes an employee injury benefit plan designed to comply with ERISA and under which benefits are paid by Sherman itself, is not the type of document contemplated by these provisions of the Texas Insurance Code.  Neither party alleges that the Plan was a “form” insurance policy submitted to or approved by TDI, and the Court cannot conceive that it was.  Therefore, Section 1701.062(a) does not apply to the Plan, and the Court finds that the discretionary clause is lawful and valid.

In ruling for Sherman, the Court ruled: Because the discretionary clause is valid , the Magistrate Judge properly reviewed the Plan Administrator and Appeals Committee’s adverse decisions for abuse of discretion.  The Court further finds that the Magistrate Judge correctly found no abuse of discretion occurred.

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