Fifth Circuit Gives You a Reason to Review Your Plan Documents (or Adopt a Wrap Plan)

April 18, 2018

A recent case from the U.S. Fifth Circuit Court of Appeals may give you a reason to double-check your plan documents (or adopt a wrap plan, if you haven’t already).

When someone is denied benefits under an ERISA plan, they can file an appeal to the plan administrator. If their claim is denied on appeal, they generally have the right to sue (or, in some cases, go to external review). When they sue, they typically argue either (1) the plan administrator got the facts of their claim wrong or (2) the plan administrator misinterpreted the plan’s terms. Sometimes, they argue both. For example, if a claim was denied as not being “medically necessary,” the participant could argue either (1) that the treatment really was medically necessary based on the facts or (2) the plan administrator misapplied the definition of “medical necessity” in the plan to their claim.

ERISA does not say how courts should review a plan administrator’s determinations. In 1989, the Supreme Court set a standard in a case called Firestone Tire & Rubber Co. v. Bruch. In that case, the Supreme Court said that a court can generally review the claim draw its own conclusions unless the plan document gives the administrator the discretion to make those determinations. Instead, if the plan document gives the administrator that discretion, the court should only review to see if the administrator abused its discretion. In other words, the court should not overturn an administrator’s determination as long as it is reasonable. This was the case even if the court would have, on its own, reached a different conclusion. This is a high standard that favors the administrator’s determination.

However, Firestone itself was primarily about an interpretation of plan terms, not factual conclusions. This appeared to leave open how courts should review the administrator’s review of the facts. Different federal courts reached different conclusions. However, most applied the Firestone framework to both conclusions of fact and plan interpretations.

Before this recent case, the Fifth Circuit (which covers Texas, Louisiana, and Mississippi) was an exception. Federal courts there generally had to accept the plan administrator’s factual findings, unless the administrator abused its discretion, even if the plan did not give the administrator that discretion. In other words, unless the administrator’s factual conclusions were unreasonable, the court had to accept them in all circumstances.

After this case, the Firestone framework now applies to both conclusions of fact and plan interpretations in the Fifth Circuit. In other words, before this case, plan administrators always got the benefit of the doubt in their factual conclusions; now, they only get the benefit of the doubt if the plan says they do. This is the same standard the Fifth Circuit already applied when the plan administrator interpreted the plan’s terms. This change also brings the Fifth Circuit in line with eight other Circuit courts which already held to this rule for both factual findings and plan interpretations.

Takeaway

Employers (whether in those three states or not) should take this case as an opportunity to check their plan documents. Employers want to make sure that their documents give the plan administrator the maximum possible discretion to make factual findings and plan interpretations. Given that the Fifth Circuit was an outlier here, most plan documents likely include this language already, but it doesn’t hurt to check. Having the language can help ease the burden in court which will hopefully reduce litigation and, as a result, plan expenses. HUB International is also checking with its major wrap plan vendor partners to ensure that their wrap plan documents give this discretion to plan administrators or request changes if they do not.

If an employer does not have a wrap plan document for its welfare benefits, it should consider adopting one. The wrap plan document is useful for several reasons. One of those is to grant this discretion to the plan administrator. The wrap plan can also supply other legal language that is sometimes missing from insurance contracts.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
 

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.