LTD Insurer’s Failure To Disclose Key Report Triggers De Novo Review

On January 21, an Alabama federal court decided that the proper standard of judicial review in an appeal of a long-term disability insurance benefit termination was “de novo” review. In an appeal of a federal disability insurance denial or termination, the court must scrutinize the actions of the insurance company according to the appropriate legal standard.

In this new case, where the insurance company – in violation of federal regulation – did not share evidence with the claimant before using it as a basis to deny an internal appeal of benefit termination, the court said the reviewing standard should be de novo, meaning the court gets to essentially reconsider the denial without deference to the insurer’s decision making.

Federal courts have differed on standard of review rules

The problem is that federal courts have been split on questions of when the “de novo” standard of review or the “arbitrary and capricious” standard is to be applied to cases governed by ERISA, the federal law that regulates insurers in group policies like the LTD policy purchased through the employer in this case: McConnell v. American General Life Insurance Company.

Arbitrary and capricious?

Generally, when the insurance plan language gives discretion to the insurer’s plan administrator to decide the disability claim, the court must apply the arbitrary and capricious standard. Under this standard, the court gives considerable deference to the plan administrator’s right under the plan to interpret the policy language and make eligibility decisions based on the medical evidence in the claim file.

Insurers like the arbitrary and capricious standard better because the court will only overturn a plan administrator’s decision if they abused their discretion or handled the claim in an outrageous way. This gives disability insurers more room in which to operate without being subject to reversal by courts.

De novo?

Appealing claimants generally favor the de novo standard because the court gets to decide the claim on its own without giving deference to the insurance company’s decision denying or terminating the claim.

The McConnell case’s reasoning

In the McConnell case, the claimant received LTD benefits for a decade, when American General Life terminated the benefits. He appealed to the insurance company, which hired an independent party to review the medical records and issue a report. The insurer denied the appeal without disclosing to the claimant that it was based on the new report, a violation of a U.S. Department of Labor (DOL) regulation.

The regulation requires that the plan administrator provide the claimant copies of any new evidence it was considering in the appeal well before issuing a denial so that the claimant would have time to respond before the insurer decides the appeal.

McConnell argued that because the insurer had violated the regulation, de novo review should apply. The court said that the insurance company did not offer much argument in support of its assertion that the standard should be arbitrary and capricious – only that the Eleventh Circuit Court of Appeals, which governs federal courts in Alabama, had rejected de novo review when an insurer violates an ERISA regulation.

The McConnell court disagreed. It reviewed the very limited case law on the issue within the circuit and determined that “the Eleventh Circuit has not foreclosed de novo review under the circumstances, and because the defendant offers no other argument in favor of an arbitrary and capricious standard of review, this action will be governed by de novo review.”

In long-term disability claims appealed to federal court under ERISA, the standard of review the court applies will usually determine the outcome of the appeal, so this decision may have a huge impact on future cases.

The McConnell case is available on Westlaw at 2020 WL 292193.