For insureds, ERISA (which governs most employer-sponsored insurance) has a serious downside. Insureds and plan participants who dispute the company’s denial of their claims for coverage or benefits must submit to ERISA’s administrative appeal process before they can file a lawsuit challenging the company’s decision. This can disadvantage the participant because failure to dot i’s and cross t’s in the administrative appeal can cause the participant to lose important rights in litigation. Moreover, because ERISA excludes many traditional state-law remedies such as punitive or exemplary damages and gives no right to a jury trial, even plan participants who successfully navigate the administrative appeals process and make it to court often face an uphill battle.
Accordingly, insurance companies spent several decades designing their benefit plans and policies to leverage ERISA against the insured. One recently-published internal memo recommended the company get as many policies as possible covered by ERISA to reduce the money the company had to pay to its insureds. The memo did a test study of 12 non-ERISA cases in which the company paid of a total of $7.8 million, estimating that ERISA’s application would have reduced the company’s liability in those cases to $0 to $0.5 million. The author concluded “the advantages of ERISA coverage in litigious situations are enormous.”
Recognizing that ERISA can favor the company over the insured or participant, the federal Department of Labor promulgated a regulation aimed at leveling the playing field, which became effective on April 1, 2018. Because the Department of Labor concluded the majority of ERISA disputes arise in disability and health plans, the new rule focuses on these types of benefits specifically. The rule’s upshot is:
- Insurers can no longer pay their employees more, or promote them, or threaten to fire them, based on how many claims they deny;
- Claimants under disability policies must receive a clear and detailed explanation of why their claim was denied, and, particularly, the company must explicitly address its disagreement with opinions about the claimant’s condition by treating physicians or Social Security;
- Clearly state any deadlines by which the insured or participant must file a lawsuit challenging the denial of benefits;
- Disability claimants must also receive a clear statement of their rights to appeal a denial of a benefit claim;
- If the company upholds its claim denial based on new information, the company must permit the insured or participant to review and respond to the new information before the denial becomes final;
- Claimants must be specifically advised of their right to examine the insurer’s entire claim file to permit them to evaluate the basis for the claim denial; and
- Notices must be written in a culturally and linguistically appropriate manner if the situation warrants.
Importantly, violations of the new rule can permit the insured or participant to bypass the administrative appeal process and sue in court directly. This reduces the risk that an insured or participant loses rights in litigation through technicalities in the appeal process.
Hopefully, the Department of Labor’s new rule will go a long way towards leveling the playing field for ERISA policyholders and plan participants.